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CHALMERS
DEPARTMENTOFTECHNOLOGYMANAGEMENTANDECONOMICS
PURCHASINGMANAGEMENT
AUTHORSAMONGOTHERSANDEDITORS: LARSBEDEY
SOFIAEKLUND
NOJANNAJAFI
WILLIAMWAHRN
KARLWESTERLUND
Purchasing Management I
Preface
Purchasing has gone through a lot of changes during the last decades. Some even refer to it as a
revolutioninpurchasing.Hence,theareahasreceivedanenormousinterestbothfromacademiaand
practice.
AtChalmersUniversityofTechnologypurchasingispartofresearchandeducationinthewiderareaof
Supply Chain Management. A masters programme was started in 2004 and since then about 200
studentshavetakentheirdegrees.AmajorityofthesestudentshavestartedacareerinSupplyChain
Management and quite a few are specialising in Purchasing. Owing to a generation shift in many
companies,accompaniedwithmajorstrategicchangessuchassupplierbasereduction,development
ofsupplierrelationshipsandoutsourcing,theircareershavebeenaccelerated.
This book is based on an advanced course in Purchasing Management as part of the masters
programmeinSupplyChainManagement.Thewholecoursefocusesonexploringthestateoftheart
in Purchasing. Based on literature reviews and case studies the students have worked on different
themeswiththejointambitiontodescribeanddiscusswhatishappeninginpurchasingtoday.
Asmuchasthebookmaygiveanideaofcurrentdevelopmentsinpurchasing,itmightalsoprovidea
presentation of a coming generation of purchasing professionals. This new generation has been
thoroughlytrainedinprojectworkinamulticulturalsetting.Theyhavealso,inadditiontopurchasing,
studiedsubjectssuchaslogistics,industrialmarketingandproductionthatduringrecentyearshave
become integrated into Supply Chain Management. This makes them well prepared to take on the
challengeofcreatingthenecessarylinksbetweencompanies,andbetweencompanyfunctions,thatis
oftenclaimedtobelackingtoenhancesupplychainperformance.Thisbookaddressessomeofthe
keyissuesinthisendeavour.
Prof.AnnaDubois,examiner
Gothenburg,December2008
Purchasing Management II
Abouttheauthors
Johan Abrahamsson took his Bachelor degree in Mechanical Engineering at Chalmers University of
Technology in 2007. After some additional courses in Logistics at Chalmers and in Business
AdministrationattheSchoolofBusiness,EconomicsandLawinGothenburg,Johandecidedtojointhe
SupplyChainManagementmastersprogrammeatChalmers.Johanplanstofinishhismastersdegree
in spring 2009 with a thesis analyzing Stora Ensos inventory control of newspaper at the German
market.Hethenhopesforacareerwithinaninternationalenvironment.
Rickard Badenfors took his Bachelor degree in Mechanical Engineering at School of Engineering at
JnkpingUniversity.HethenattendedamasterinSupplyChainManagementatChalmersUniversity.
Rickardplanstobefinishedwithhismaster'sdegreeduringthespring2009.Whenbeingdonewith
thestudiesRickardhopesforacareerabroadinaninternationalcompany.
Lars Bedey took his Bachelor degree in Industrial Engineering in combination with Electrical
Engineering at the Technical University of Brunswick in Germany. After coming to the Chalmers
University of Technology as an Erasmus student he decided to join the international masters
programmeofSupplyChainManagementatChalmers.Larsplanstofinishhismastersdegreewitha
thesisfocusingonbuyersupplierrelationshipsandpurchasingduringspring2009.Hethenaimsfora
careerinaninternationalenvironment.
Lidia Bolotova took her Bachelor degree in International Economics at Ural State University of
TechnologyinRussia.Afterworkingforseveralmonthsinthetransportcompany,shetookaninterest
inSupplyChainManagementanddecidedtojointhe masterprogrammeatChalmers.Lidiaplansto
finish her masters degree with a thesis focusing on Strategic purchasing at Volvo logistics during
spring2009.Shethenhopesforacareerintheautomotiveindustry.
MartinDahl,abecoming graduate mechanical engineer at Chalmers Universityof Technology. After

takinganadditionalcourseinlogisticsMartindecidedtojointheMastersprogrammeofSupplyChain
ManagementatChalmers.Martinplanstofinishhisdegreeduringthespringof2009.Hethenhopes
foraninternationalcareerwithinpurchasingandlogistics.
About the authors III
Sofia Eklund took her Bachelor degree in Mechanical Engineering with the focus on industrial
managementandproductionatSchoolofEngineeringatJnkpingUniversity.Thisdegreeincludeda
semesteratCurtinUniversityofTechnologyinPerth.TheinterestforSupplyChainManagementgrew
duringtheeducationandshedecidedtojointheSCMmastersprogrammeatChalmers.Sofiaplansto
finish her masters degree with a thesis focusing on aftermarket strategies in different business
marketsduringspring2009.Shethenhopesforacareerintheproductionindustry.
MartinEliassoniscurrentlystudyingthemastersprogrammeSupplyChainManagementatChalmers.
HeholdsaBachelordegreeinMechanicalEngineering,IndustrialManagementandProductionfrom
Jnkping University. During the Bachelor degree he studied one semester at Deakin University of
Technology in Australia. Martin plans to finish his masters degree with a thesis focusing on
aftermarket strategies during spring 2009. Finally, Martin particular enjoys purchasing management
andwishestoworkwithinthatfield.
Bettina Eriksson took her Bachelor degree in Industrial Economy and Management at Chalmers
University in Gothenburg and continued on to the masters programme Supply Chain Management.
Duringspring2009BettinawillwritehermasterthesisonintegratedtransportationsolutionatWSP
Groupandaftergraduationshehopestostartacareerwithinlogisticsandtransportation.
IsmailGlgecitookhisBachelordegreeinIndustrialEngineeringatYildizTechnicalUniversityin2006.
After 1 year of internships in Poland and Ukraine he took interest in Supply Chain Management and
admittedtothemastersprogrammeatChalmersUniversityofTechnology.Ismailplanstofinishhis
mastersdegreewithathesisfocusingonDevelopingSourcingStrategiestoImproveAddedValues
atIndutradeFlowTechnologyduringspring2009.Hethenhopesforanacademicorbusinesscareerin
theindustrialmarketingandpurchasingarea.
S.DavoodImentookhisbachelor'sdegreeinIndustrialEngineeringinIran.Tofollowhisinterest,he
decidedtostudyinSupplyChainManagementfieldabroadandchoseSweden.Heisnowworkingon
hismasterthesis.Theaimistoproposeamodelforincreasetheefficiencyofpackagingsystemalong
theretailsupplychain,thereforetheefficiencyofsupplychaincanimprove.Thethesisissponsoredby
the STFIPackforsk, a leading R&D company in the field of packaging and logistics in Stockholm. He
thenhopestopursuehisstudyinaPhDprogram.
Masoud Mostafavi took his Bachelor degree in Industrial Engineering at Islamic Azad University
Najafabad branch. Pursuing higher education, he took an entrance exam and was admitted for the
masters program IT and Management at Amirkabir University of Technology (Tehran Polytechnic)
butafteronesemesterherealizedthatheismoreinterestinSupplyChainManagementanddecided
tojointhemastersprogrammeatChalmers.Forthenearfuture,MasoudisaimingforaPhDposition
relatedtooneofhisareasofinterest,especiallyinthelogisticsandtransportationfield.
Purchasing Management IV
NojanNajafigothisB.S. in Industrial Engineering at Azad University of Najafabad. Being involved in

some research studies on ERP implementation became his first motivations for pursuing logistics
issues in the Supply Chain Management masters programme at Chalmers. Nojan is performing a
researchprojectasthemastersthesisonmathematicalmodelingofsparepartswarehouses,whichis
goingtobefinishedinspring2009.Heplansforanacademiccareerafterhismastersdegree.
KaarelRandgraduatedhisBachelorprogrammeinLogisticsatTallinnUniversityofTechnology.The
followingworkexperienceinDefenseForcelogisticsbroughthimintocontactwiththeSupplyChain
Management masters programme at Chalmers which he joined in 2007. Kaarels ambitions are to
graduatewiththethesislookingintosupplierrelationsinpurchasingandsupplychainintegrationand
tocontinuehiscareerinasimilarline.
Niclas Schollin took his Bachelor degree in 2007, in the field of business development and
entrepreneurship. During his studies he got interested in logistics and purchasing in different
organizations. In consequence, he decided to continue his studies with a master program in Supply
ChainManagement.Hehopesforasuccessfulcareerinthefieldoflogisticsandpurchasing.
SiShenobtainedherBachelordegreeofTrafficandTransportationatShandongUniversityinChina.
AfterthatshetooktheinternationalmastersprogrammeofSupplyChainManagementatChalmers
UniversityofTechnologyinSweden.ShehopestoworkwithinSupplyChainManagementareaafter
graduation,especiallywiththosecompanieswhichexpandbusinessinChina.
Tomasz Szymelfejnik has studied Logistics and Transportation Technology at Warsaw University of
Technology. After three years of education he has joined Supply Chain Management masters
programmeatChalmers.Tomaszisinterestedinnewapplicationswithintheautomotiveindustryand
is planning to write his thesis project on combining product development processes with related
customerrelationshipmanagement.
William Wahrn took his Bachelor degree in Industrial Engineering and Management at Chalmers
University of Technology. After this he spent one semester at the University of Twente in the
Netherlands studying Business and Administration. This was followed by a few months working as
consultant before joining the masters programme Supply Chain Management at Chalmers. William
continuedtoworkparttimeasaconsultantinparallelwiththestudies.Heenvisagesafuturecareer
workingwithproductivityenhancementandcontinuousimprovements.
PrLinusWestberg took his Bachelor degree in Business development and entrepreneurship within
construction at Chalmers Institute of Technology. After the Bachelor degree he took an interest in
SupplyChainManagementanddecidedtojointhemastersprogrammeatChalmers.PrLinusplans
to finish his masters degree with a thesis focusing on Optimizing production flows at SAPA in the
USAduringspring2009.HethenhopesforacareerintheORKLAGroup.
About the authors V
Karl Westerlund took his Bachelor degree in Industrial Engineering at Chalmers University of
Technology.AftersummerstudiesatStanfordUniversityandUniversityofCaliforniaBerkeleyhetook
interestinSupplyChainManagementanddecidedtojointheSCMmastersprogrambackatChalmers.
Karlalsohasexperiencesfromtheretailingbusinessandfromthevehicleproductionindustry,which
he got from internships and weekend jobs. He has also worked as a logistic supervisor/teacher
assistantatChalmersandhehasalsodevelopedalectureabouttheproductionimprovementmethod
5S at the department of logistics and transportation at Chalmers. Karl plans to write his masters
degreewithathesisfocusingonsupplierdevelopmentandLEANandhopesforacareerinthefield
ofpurchasingorproductionimprovement.
Henrik Zander took his Bachelor degree in Mechanical Engineering at Lund Institute of Technology.
AfteraoneyearinternshipinaSwedishproductioncompanysituatedinShanghaiheisnowfinalizing
hisstudieswithamasterdegreeinSupplyChainManagementatChalmersUniversityofTechnology.
Henrik will finish his studies in Supply Chain Management with a master thesis as Volvo Logistics
duringthespring2009.
Jeser A. Zendejas obtained his Bachelor of Science degree in Industrial Engineering with Minor in
SystemsEngineeringattheMonterreyInstituteofTechnologyandHigherEducation,ITESM.After2
years working for ITR Turborreactores and 1 year at Kuehne + Nagel Mexico he decided to join the
masters programme at Chalmers to specialize his knowledge and develop his career within his
expertisefield.JeserwillfinishhismastersdegreeworkingforKuehne+NagelABduringspring2009,
carrying out a thesis on Supply Chain operations in the Retailer sector. Afterwards, he plans to
continuehiscareerintheSupplyChainSolutionsarea.

Purchasing Management VI
Tableofcontents
[1] DefinitionandtrendswithinPurchasingManagement........................................................................1
Introduction...............................................................................................................................................2
DefinitionofPurchasingManagement......................................................................................................2
TheimpactofPurchasingManagement...............................................................................................3
PurchasingManagementandcorporatestrategies..............................................................................4
HistoryandtrendswithinPurchasingManagement.................................................................................5
TrendswithinPurchasingManagementinthe1990s...........................................................................6
[2] PurchasingOrganization.......................................................................................................................9
Introduction.............................................................................................................................................10
Therequirementsforpurchasingorganization.......................................................................................10
Functions.............................................................................................................................................11
Trends..................................................................................................................................................11
Purchasingorganizationstructure...........................................................................................................12
Centralization......................................................................................................................................12
Formalization......................................................................................................................................14
Dynamics.............................................................................................................................................16
Otherorganizationalfactors....................................................................................................................17
Summary..................................................................................................................................................19
[3] InternalCollaboration.........................................................................................................................21
Introduction.............................................................................................................................................22
Importanceofinternalcollaboration..................................................................................................22
Table of contents VII
Purchasingcollaborationwithotherdepartmentswithintheinternalorganisation.........................24
Informationsharingstructures...........................................................................................................28
Conclusions..............................................................................................................................................30
[4] SourcingStrategies..............................................................................................................................31
Introduction.............................................................................................................................................32
GlobalSourcing........................................................................................................................................33
Lowcostcountrysourcing..................................................................................................................34
OutsourcingInsourcing.......................................................................................................................35
SinglesourcingMultiplesourcing.........................................................................................................36
Partnershipsourcing................................................................................................................................36
[5] Purchasingportfoliomodels...............................................................................................................39
Introduction.............................................................................................................................................40
TheoryandLiteratureReview..................................................................................................................41
TheKraljicMatrix................................................................................................................................41
Suppliersegmentations.......................................................................................................................43
Amutualdependencebasedpurchasingportfolio.............................................................................46
Addingevaluationofsuppliercooperation.........................................................................................47
Adaptingpurchasingstrategiesaftersupplysituations......................................................................49
Managingsuppliersegmentationportfoliomodelsandrelationships...............................................51
Relationshipscorrelationtoinvestments...........................................................................................54
Empiricalstudy.........................................................................................................................................56
Analysis....................................................................................................................................................60
VolvoLogistic.......................................................................................................................................61
SonyEricsson.......................................................................................................................................65
Conclusion................................................................................................................................................68
[6] CorporateSocialResponsibilityinPurchasingManagement..............................................................69
Purchasing Management VIII
Introduction.............................................................................................................................................70
EthicsinPurchasingManagement...........................................................................................................71
AtrendtowardsEthicalPurchasing....................................................................................................71
CodesofConduct................................................................................................................................73
BenefitswithanEthicalBehaviour......................................................................................................74
WhycompaniesfailinmakingEthicalPurchases................................................................................75
SocialResponsibility.................................................................................................................................77
Diversity..............................................................................................................................................77
Philanthropy........................................................................................................................................78
BenefitsandDriversofSocialResponsiblePurchasing.......................................................................79
ReachingasupplychaincomplyingwithCSRstandards.....................................................................80
EnvironmentallySustainablePurchasing.................................................................................................81
CancompaniesbecompetitivewhenactingaccordingtoCSRstandards?.............................................82
[7] EnvironmentallyPreferablePurchasing..............................................................................................87
Introduction.............................................................................................................................................88
EnvironmentallyPreferablePurchasing...................................................................................................88
ImpactofimplementingEnvironmentallyPreferablePurchasing......................................................89
TrendsthatleadtoimplementanEnvironmentallyPreferablePurchasing............................................89
Safetyandhealth................................................................................................................................90
Globalwarming...................................................................................................................................91
FindingandevaluatingGreenProductsandServices..............................................................................91
GreenProductsandServices...............................................................................................................92
Environmentalattributestolookfor..................................................................................................93
Casestudy................................................................................................................................................95
[8] InformationSystemsinPurchasingManagement..............................................................................97
Introduction.............................................................................................................................................98
Table of contents IX
Methods...................................................................................................................................................98
EDI.......................................................................................................................................................99
Internet.............................................................................................................................................100
Analysistools.........................................................................................................................................104
ITdrivenproblemsinpurchasing..........................................................................................................105
[9] SupplierSelectionwithfocusonchoiceofevaluationcriteria.........................................................107
Introduction:Whyissupplierselectionimportant?..............................................................................108
Whatcriteriashoulddecisionmakersfocuson?...................................................................................108
Supplierselectionmethods...................................................................................................................109
Servicesupplierselection.......................................................................................................................111
Summary................................................................................................................................................114
[10] Supplierselectionusingafuzzylinearprogrammingmodel........................................................115
Introduction...........................................................................................................................................116
Thescreeningprocess............................................................................................................................116
Supplierselectioncriteria..................................................................................................................117
Theanalytichierarchyprocess..........................................................................................................120
Thefuzzylinearmodel...........................................................................................................................120
Conclusion..............................................................................................................................................122
[11] SupplierselectionusingISOstandards.........................................................................................123
Standardsandcertifications..................................................................................................................124
ISO9000............................................................................................................................................124
ISO14000..........................................................................................................................................125
Certification.......................................................................................................................................125
Effectsofimplementation.....................................................................................................................125
ISO9000............................................................................................................................................126
ISO14000..........................................................................................................................................127
Purchasing Management X
Supplierselection...................................................................................................................................128
Keyfactorsforsupplierselection......................................................................................................128
Standardsforsupplierselection........................................................................................................130
[12] Tacitknowledgetransfer,acrucialpartofsupplierdevelopment...............................................133
Introduction...........................................................................................................................................134
DefinitionandImportanceofsupplierdevelopment............................................................................135
Suppliersperformancereview..............................................................................................................136
Genericsupplierdevelopmentactivities...............................................................................................137
Directfirminvolvement....................................................................................................................138
Incentives..........................................................................................................................................139
Enforcedcompetition........................................................................................................................139
Tacitknowledgetransfer.......................................................................................................................144
Thecharacteristicsandessentialfactorsoftacitknowledgetransfer..............................................145
Tacitknowledgetransferactivities...................................................................................................146
Conclusion..............................................................................................................................................149
[13] Supplierdevelopmentwithqualityfocus.....................................................................................151
Purpose..................................................................................................................................................152
Introduction...........................................................................................................................................152
Conceptofsupplierdevelopmentanditsqualityimplications.............................................................153
Supplierqualitydevelopmentphasesandactivities..............................................................................154
Supplierqualitydevelopmentindevelopingcountries.........................................................................157
Conclusion..............................................................................................................................................161
[14] Supplierbuyercollaboration,onewaytoreachsuccess.............................................................163
Introduction...........................................................................................................................................164
Thestudies:Review...............................................................................................................................165
CorstenandFelde.............................................................................................................................165
Table of contents XI
OhandRhee......................................................................................................................................165
GonzalezBenito................................................................................................................................166
VereeckeandMuylle.........................................................................................................................166
Thestudies:Resultsandfindings...........................................................................................................167
Conclusion..............................................................................................................................................169
[15] Informationsharing,thedriverofaproficientbuyersupplierrelationship................................171
Introduction...........................................................................................................................................172
Conceptualframework..........................................................................................................................172
Informationsharinginbuyersupplierrelationship..........................................................................173
Benefitsofinformationsharinginbuyersupplierrelationship........................................................174
Affectionsonbuyersupplierrelationship.........................................................................................174
Reflectionofthecase........................................................................................................................176
Conclusion..............................................................................................................................................178
[16] Appendices...................................................................................................................................179
Exampleofresultsfromthemodel...................................................................................................179
Performanceassessment..................................................................................................................179
Humanresources..............................................................................................................................180
Qualitysystemassessment...............................................................................................................180
Manufacturingcriteria......................................................................................................................181
Businesscriteria................................................................................................................................181
InformationTechnology....................................................................................................................182
[17] Bibliography..................................................................................................................................183

Purchasing Management XII
Listofcases
Casestudy:VolvoLogistic...........................................................................................................................56
Casestudy:ProcurementofplasticpartsatSonyEricsson.......................................................................59
CaseStudy:HowSwedishtoyretailersmisjudgedtheirChinesesuppliers..............................................76
CaseStudy:HowH&MintegratesCSRintotheirBusinessStrategy........................................................83
Casestudy:TheBodyShopSocialandEnvironmentalconcerns,theonlywaytodobusiness.........95
CaseStudy:BASACo.AnexperiencedERPimplementer........................................................................99
Casestudy:Indoorclimate..........................................................................................................................111
Casestudy:BEKO,anappliancecompanywhousedthefuzzylinearmodel...........................................121
Casestudy:Volvo3p(1)..............................................................................................................................139
Casestudy:Volvo3p(2).............................................................................................................................158
Casestudy:CumminsandToshiba.............................................................................................................174

Definition and trends within Purchasing Management 1
[1] Definitionandtrendswithin
PurchasingManagement
The aim of this chapter is to provide the
reader with an introduction to
Purchasing Management in order to
fully appreciate the book. The chapter
presents the books definition of
Purchasing Management as well as
briefly presenting the potential benefits
with working at a strategic level with
purchasing activities for a corporation.
Furthermore trends and historical
developments within the area of
Purchasing Management will be
presented.
Purchasing Management 2
Introduction
The aim of this book is to present current developments as well as the state of the art within
Purchasing Management. To do this in a meaningful and structured way the books definition of
Purchasing Management must firstbe established. This definition will be presented to the reader in
thischapterandtherestofthebookwillonwardsbebasedonthisdefinition.Thischapterwillalso
highlight the importance of Purchasing Management within an organization. Furthermore, some
readerswillhavepreviousexperiencewiththetopicofPurchasingManagementandthereforealsobe
familiar with the historical developments within the area. Others, however, will not have this
knowledgeandforthisreasonthischapteralsopresentsandoutlinesthetrendsandeventsthatled
tothecurrentstateoftheart.Thedevel0pments,whichthisbookwillfocuson,aretheonesofthe
secondhalfofthe20thcentury.Theemphasiswillbeonthe1990s,sincethatperiodoftimeincludes
themostsignificantdevelopmentswithinthistopic.
DefinitionofPurchasing
Management
There does not exist many definitions of Purchasing Management and the difference to the well
known concept strategic purchasing is not very clear. Strategic Purchasing is often described and
definedas:whenpurchasingactivitiesarelinkedtothecorporatestrategicplanningprocess.Hereis
onemoreexplicitdefinitionofstrategicpurchasingwrittenbyCarrandSmeltzer(1997):
Strategicpurchasingistheprocessofplanning,implementing,evaluating,andcontrollingstrategicand
operatingpurchasingdecisionsfordirectingallactivitiesofthepurchasingfunctiontowardopportunities
consistentwiththefirm'scapabilitiestoachieveitslongtermgoals.
Thisbookwillbebasedonthisdefinitionanditwillinotherwordsworkasadefinitionforthebooks
conceptPurchasingManagementaswell.ThisisdonesincePurchasingManagementcanbedefined
as the concept of managing strategic purchasing. The structure of the book and the concept of
Purchasing Management willalso be described with help of a conceptual model which is developed
andmostlybasedonexistingliteraturewithinthetopicofpurchasingandsupplychainmanagement.
Themainfocus ofthis model is that Purchasing Management is located at the boundary between a
corporateorganizationsexternalandinternalbusinessnetwork.Thebusinessnetworkisdefinedasa
network of activities, resources and actors (Ford, et al., 2003). On the internal side of the business
network the activities are often represented of internal process within the own organization and
resourcesareoftenownedbythefocalfirm.Theactorshereareusuallyemployeesordepartments
within the corporate organization. On the external side of the industry network, the activities are
represented by supplier activities or joint activities between different actors as competitors,
customers and suppliers. The resources are owned by suppliers or jointly owned by different actors
suchascompetitors,customersandsuppliers.Theactorsontheexternalsideoftheindustrynetwork
areprimarilythesuppliers,seeFigure1.
Internal network of activities, resources External network of activities, resources

and actors and actors
Internal organizational tasks: External collaboration tasks:
Collaboratewiththeinternalnetwork Collaboratewiththeexternalnetwork
Operatingpurchasingdecisions Mangesupplierrelations
Purchasing
Definepurchasingstrategies Management Coordinatejointactivities
Organizetheboundaryinteraction Monitor,evaluateanddevelopsuppliers
Figure1ConceptualmodelofPurchasingManagement.
Thepurposewiththisbookistocovertheconceptualmodel(seeFigure1)bydescribingthevarious
elementsofthemodelintothebooksdifferentchapters.Furthermore,thepurposeofthebookisto
present a stateoftheart way of operating and manage purchasing activities. This will be done by
presentingsome successful guidelines and methods based on both literature and real business case
examples.
TheimpactofPurchasing
Management
A large study based on 175 company surveys with a respond rate of 22% performed by Carr and
Pearson (2002) shows that the factors strategic purchasing and Purchasing Management have a
positive impact on the firms financial performance in both small and large firms. Carr and Pearson
(2002)alsowritethatPurchasingManagementandsupplierinvolvementdoesaffectthesuccessofa
newproductintroduction.Thisstudyalsoshowsthatalinkexistbetweenimplementationofstrategic
Purchasing Management and achievements of a firms comprehensive goals. It is also stated in the
report by Carr and Pearson (2002) that it is believed that most firms recognize the importance of
strategicpurchasing,becausetheyspendalargepercentageoftheirsalesonpurchasedinputs.
Carr and Pearson (2002) also finish their study with the words Based on this study, management
shouldbetterunderstandtheimportanceofPurchasingManagement,supplierinvolvement,strategic
purchasinganditsrelationshipswithfirmsfinancialperformance.
PurchasingManagementand
corporatestrategies
TocomplementthefindingsofCarrandPearson(2002)oneadditionalstudy,madebyEllramandCarr
(1994) was selected. That study clearly indicates that purchasing strategy should be a part of the
overallcorporatestrategy.Themovementtowardglobalsourcing,rapidchangesintechnology,and
increased competition requires purchasing to assume more responsibility in the planning and
implementation of strategies to support the overall corporate strategy. Suppliers do also more and
morestattoplayacriticalroleregardingthesupportofafirmscompetitivestrategy(Ellram,etal.,
1994).
Ellram and Carr (1994) also define four stages of purchasing organization related to the level of
strategydevelopment.Thefourstagesare:
StageIisapassivestage,inthisstagethepurchasingprocessnormallybeginsasareactorbasedon
requestsfromotherdepartmentsinacorporateorganization.Manyofthepurchasingactivitiesand
processesarehandledbytotallyotherfunctionsthanpurepurchasingfunctionswithinthecorporate
organization(Ellram,etal.,1994).
Stage II is an independent stage where the purchasing departments spend considerable time
attempting to professionalize the own purchasing function by introducing such things as
computerizedinformationsystems,formalizedsupplierprogramsandcommunicationlinks(Ellram,et
al.,1994).
StageIIIisasupportivestagewherethepurchasingdepartmentsareviewedbytopmanagementasan
essentialbusinessfunctions.Thepurchasingorganizationisexpectedtosupportandstrengthenthe
firms competitive advantage by providing timely information to all surrounding departments in the
firmaboutforexamplepotentialchangesinthepriceandavailabilityofgoodsandserviceswhichmay
impactthefirmsstrategicgoals(Ellram,etal.,1994).
StageIVistheintegrativestage,inthisstagethefirmscompetitivesuccessrestssignificantlyonthe
capabilities of the purchasing departments personnel. The purchasing departments role within the
firmisalsochangedfromfacilitatortofunctionalandthisdevelopmentprocessmustbeimplemented,
significant supported and guided by management. The longterm perspective is also of great
importantregardingdevelopmenttothisstage(Ellram,etal.,1994).
Hopefully,itisnowclearthatPurchasingManagementshouldbetreatedatastrategiclevelwithinthe
corporate organization and that the purchasing department should be managed and used as it is
representing an important part of the firm. The following part of this books chapter will focus on
somehistoricaltrendsandchangeswithintheareaofPurchasingManagement.
Historyandtrendswithin
Procurementisregardedbyexecutivemanagementasanegativefunctionit
can hinder the company if not done well, but can make little positive
contribution.(Henderson,1975)
This was stated in the mid 1960s, by the purchasing professional Bruce D. Henderson, who spoke
aboutthesituationandopinionsregardingpurchasingatthetime.Hearguedthatpurchasingwasa
neglectedfunctioninmostfirmsbecauseoffexecutivemanagementsbeliefthatitwasnotimportant
orrelevanttomainstreamproblems.(Trent,etal.,1998)
Since 1960s and since the middle of the 1980s in particular, the strategic role of purchasing and
PurchasingManagementhasreceivedconsiderableattentioninacademicsandtradejournalsaswell
as inpopularpress. Asfirms startedto seethe importance ofpurchasinginput in their organization
theroleofpurchasingwaschangedfromanotconsideredimportantpartoftheorganizationversesa
more important strategic role and resource of the firm (Carr, et al., 2002). Over the past three
decades,purchasinghasslowlystartedtogainvisibilityinfirmsallaroundtheworld.Thisevolutionary
processhasbeenslowinwordsoftimeduetothefactofcontinuousgeneralmanagementfailures.
Managers have failed to understand the critical role of purchasing and thereby not focused on its
issuesandstrategies.Ammer(1989)notedthatpriortothe197374oilcrises,topmanagementviewed
purchasingashavingapassiveroleinthebusinessorganization.Butamajorpointintherecognition
of purchasing strategy occurred when Porter (1980) emphasized the importance of the buyer in his
model of the five forces that impact the competitive nature of an industry. The 1980s marked the
beginning of a shift in attitude towards including the purchasing role in corporate strategy. In the
1970s and early 1980s, purchasing took a supportive role, ensuring that supplier quality met the
required standards for production. During the 1990s, the literature indicates a movement toward
integratingpurchasingintothefirm'sstrategicplanningprocess.Today,thepurchasingdepartment's
abilitytoimpactstrategicplanninghasincreasedinanumberoffirms.(Carter,etal.,1996b).

Figure2summarisesthedevelopmentofpurchasingfrom1970sto1990s.
Figure2Historicaldevelopmentofpurchasingmanagement
TrendswithinPurchasing
Managementinthe1990s
As mentioned above, Purchasing Management has undergone a high degree of change since its
neglected state back in the 1960s. This is particularly true for the 1990s, where there was a great
change in opinion regarding purchasing. According to a yearly survey conducted at Michigan State
University the perceived importance of suppliers and purchasing/sourcing increased significantly
during the 1990s and was widely acknowledged by executive managers by the end of the decade
(Trent, et al., 1998). By this time several researches argued that the performance of the purchasing
functionsdidinfactaffectoverallcompanyperformanceandthatitshouldbeconsideredaspartof
the corporate strategy (Johnson, et al., 1998). A study performed by Kemppainen and Vepslinen
(2003)alsoshowedthattheperceivedimportanceofpurchasing,comparedtootherfunctions,had
increased significantly from then 1990s to the start of the naughtiest. This trend was most likely
supportedbytheincreasingstatusofSupplyChainManagement.
AccordingtoTrentandMonczka(1998)theincreaseinsupplierimportanceisaresultofatleastfive
factorsthataffectmostindustries:
1. Theneedtocontrolunitcosts
2. Theneedtoreducethetotalcostofacquisition
3. The increasing influence that suppliers have on the purchasers ability to respond to end
customers,particularlyasitaffectstimerelatedrequirements
4. Anincreasedrelianceonfewersuppliers,and
5. Awillingnessofpurchaserstorelyonsupplierstodesignandbuildentiresubassembliesand
subsystems.Thesefactorshaveheightenedthesuppliers.(Trent,etal.,1998)
Internalorganisationaltrends
Theshiftsince1990inpurchasingresponsibilitiesrevealsalargescalemovementawayfromtactical
commitments and movement toward strategic or valueadding tasks (Trent, et al., 1998). The trend
towardsstrategicpurchasingwasalsoevidentintheresultsfromthe1994NorthAmericanExecutive
PurchasingRoundtable(Carter,etal.,1996a).
The1990salsosawthestartofEDIandsystemdevelopment.Theuseofthesesystemsgrewyearlyin
the1990sbuttherateofgrowthwasnewermeetthepredictedrate(Trent,etal.,1998).Atthe1994
North American Executive Purchasing Roundtable it was concluded that EDI and increased use of
information systems was both ranked amongst the top five most significant trends (Carter, et al.,
1996a).Otherstudies,however,showthattheoutsourcingofITgrewdramaticallyduringthe1990s
sinceitwasnotconsideredacorecompetence.(Kakabadse,etal.,2002)
During this period emphasis also grew on the use of crossfunctional teams to support sourcing
decisions,suchasevaluating,selecting,andmanagingsuppliers.Therewere,however,stillmanyfirms
who did not succeed in establishing such teams despite their willingness (Trent, et al., 1994). The
emphasisandsubsequentuseofcrossfunctionalteamsdoeshoweverseemtobeincreasing.In1990,
lessthanhalfoffirmsincludedintheMichigansurveystatedthattheyemphasisedtheuseofcross
functional teams. This number had increased to over 75 percent by 1997. The study also found that
purchasinggroupsorganizedaroundcommoditiesdecreasedwhilegroupsorganizedaroundenditem
increasedduringthe1990s.(Trent,etal.,1998)
The 1990s also witnessed an increased focus on the concept of corporate social responsibilities
(EuropeanCommission,2001)(Carter,2000)aswellasthatofgreenorenvironmentalpurchasing.By
theendofthedecadegreenpurchasingeffortswere,however,stilllargelyreactive.Therewerealso
many obstacles, primarily economical, which prevented green purchasing from becoming effective.
(Min,etal.,1997)
Externalcollaborationtrends
Thereisevidenceofanincreaseddependenceonsuppliersforproducttechnology.Accordingtothe
studyconductedatMichiganStateUniversitytherelianceonexternalsourcesforproducttechnology
increasedfrom37percentto44percentbetween1993and1997.Concentratingoncorecompetencies
and technologies and an increased emphasis on outsourcing noncore processes are factors that
contributedtothegrowthinexternalreliance.Furthermore,pressuretoincludethelatesttechnology
in product designs makes supplier contribution increasingly important. According to the study
executive managements awareness of the importance of the suppliers role in supporting product
developmentincreasedsteadilyduringthe1990s,growingfrom4.5in1990to5.9in1997(where1=
limitedimportanceand7=significantimportance).(Trent,etal.,1998)
Closeto75percentoffirmstakingpartintheMichigansurveydecreasedthenumberofsuppliersthey
maintainedbetween1993and1998.Furthermore,over80percentofthefirmsexpectedacontinued
reductioninthesizeoftheirsupplybasethroughtheyear2000.Thereductionsinsuppliernumbers
were however most aggressive as the late 1980s and early 1990s (Trent, et al., 1998). A survey
conductedbyCarterandNarasimhan(1996c)alsoshowedthatfirmswereexpectingtodecreasetheir
supplierbase.
During the 1990s the percentage of longterm contracts as well as the percentage of dollar value
handledbylongtermcontractsincreased.Thepercentageoflongertermcontractstototalcontracts
hasincreasedfrom24percentoftotalcontractsin1990to36percentin1997.Dollarvaluepercentage
increasedfrom34to50percentduringthesametimeperiod(Trent,etal.,1998).Simpsonetal.(2002)
alsofoundtoagrowingfocusonlongtermrelationswithsuppliers.Relatedtothis,Kakabadseand
Kakabadse (2005) conclude that there is an existing trend emphasising managing relationships with
keytrustedsuppliers.Also,theimportanceofstrategicallianceswithsupplierswasemphasisedatthe
1994NorthAmericanExecutivePurchasingRoundtable(Carter,etal.,1996a).
Traditionally the approach to supplier evaluation, if one existed within a firm, in purchasing was
focused on price, quality and delivery. These factors are still the most used but some firms have
started to supplement them with other factors relevant to the industry. This can improve the
purchasing firms ability to choose the most suitable supplier. Examples can be a suppliers process
capabilities,equipmentandqualitymanagement(Goffin,etal.,1997).Otherimportantfactorscanbe
communication and continuous improvement efforts (Simpson, et al., 2002). Companies also
increased their understanding of the benefits of having a formal way of evaluating and retaining
suppliers. Furthermore, it is reasonable to believe that the increased emphasis on green purchasing
(Min,etal.,1997)andcorporatesocialresponsibility(EuropeanCommission,2001)hasalsostartedto
influencethesupplierselectionprocesses.
Purchasing Organization 9
[2] PurchasingOrganization
The structure of the purchasing
department is especially important in
external and internal networks. The
organizational model must facilitate
activities in different strategic levels as
well as cope with changes in external
environment. By adjusting formalization
and centralization levels, the
organization can be positioned to best
support the organization. However, no
universal solution exists, as the right
structure is highly company specific and
dynamic over time. Therefore, this is
one of the major challenges that
Purchasing Management confronts
within business networks.
Introduction
Inthischapterthepurchasingorganizationissuesareaddressedwhataretheprerequisitesforsuch
organization and what should be considered beforehand, what are possible solutions and which
attributesaretheretodifferentiatebetweenvariousconfigurations.Inaddition,attentionisdrawnto
fewkeyelementsthatshouldbeconsideredwithinanycertainstructure.
The chapter focuses mainly on manufacturing companies, which leaves service providers as well as
publicsectororganizationsoutofscope.However,asstructuraldesignisanissueinanyorganization,
theunderlyingprinciplesforthesupplydepartmentcanbeappliedoutsidethescopediscussedinthe
chapter.
Therequirementsforpurchasing
organization
Everycompanycanbeidentifiedbyitsgoalandthepolicyforachievingthisgoal.Thepolicydevises
organisational setup to facilitate the activities stated in the policy (Quayle, 2006). Therefore every
functionthatperformsthoseactivitiesrunsunderaspecificorganizationalstructure.Thosestructural
arrangements influence the performance of the individuals in the organization as that is what
determinestheduties,responsibilities,andrelationsofthefunction(Quayle,2006).Thus,inbusiness
networks, interactions and processes among the actors are conditioned by the way companies,
businessunitsanddepartmentsareorganized.(Gadde,etal.,2001)
In order to maximize performance, a company needs to adjust its structure and management
processestothechangesintheoutsidecompetitiveenvironmentandalsotofacilitatethenecessary
cooperation between various parts within the company. (Johnson, et al., 2001) Therefore it has to
meet both external as well as internal communication requirements. As purchasing is a part of a
companythatliesinthemeetingpointofthoseenvironments,theissueofstructuraldesignbecomes
especiallyrelevanthere.
Thestartingpointfordecidinguponappropriateorganizationalsetupistoidentifytherequirements
setforpurchasingfunctionbybusinessstrategy,externalenvironment,andotherfactors.Inaddition,
according to contingency theory, it is crucial to recognize ongoing trends and changes in supply
processesinordertoincreasethecoherencewithcurrentbusinessenvironmentaswellaspreparethe
organizationforfuture.(Wood,2005),(Johnson,etal.,2008)
Functions
Purchasing needs to facilitate activities of three different characters operational, tactical, and
strategic (Van Weele, 2005). According to Gadde, et al. (2001), the purchasing profession today
includes four subfunctions over those different levels: ordering, negotiating, sourcing, and supply
chainmanagementintermsofsynchronizingmaterialflows.
U Ordering includes mainly the administrative side of purchasing in the form of expediting
orders.Thisisapurelyoperationalactivity.
U Negotiating deals with selecting the economically most feasible supplier(s) from the list of
approvedvendors;while
U Sourcing involves the purchasing function in procurement decisions prior to the decision of
approvedlist.Purchasingisconsideredstrategicfromthatpoint.
U Supply chain management broadens the scope of purchasing by taking responsibility for
synchronizinginboundmaterialflowswiththerestofcompanysoperations.
Quayle(2006)arguesthatthosesubfunctionsshouldnotbeisolatedfromoneanother.Forexample,
it might increase efficiency through specialization to allocate expediting and strategic issues to
separate persons but also, having to do the operational work can lead the buyer to select more
reliable suppliers. For similar reason of better decisions, it is common that purchasing strategic
mattersandsalesoperationsarecontrolledbythesameperson.Itallowsbetteralignmentofmaterial
and information flows throughout the entire organization. Further discussion on work allocation in
purchasingstructurewillbeaddressedinlaterstagesofthischapter.
Trends
It is also important to consider the dynamics of supply function when designing the structure. The
trends detected in purchasing characteristics today have been previously described in chapter [1]
DefinitionandtrendswithinPurchasingManagement.Conclusivelytheywere:
U increasingstrategicroleofpurchasingincorporatepolicy;andthus
U shifttowardsmorecentralizedcontrol
U decreasingnumberofsuppliers
U increasingnumberoflongtermcontracts
U buyinggroupsorganizedaroundenditemsratherthancommodities
Therefore these are the ongoing changes and activities (the four subfunctions) that purchasing
organization has to facilitate in modern business environment. Around that core the rest of the
structurecanbebuilt.
Purchasingorganization
structure
Havingidentifiedthe goalsandrequirements forthe organization, the appropriate structure for the

organization can be considered. Designing an organization refers to the process of assessing and
selecting the structure and formal system of communication, division of labor, coordination, control,
authority and responsibility required to achieve an organizations goals. (Trent, et al., 2005) Asgoals
aredifferent,theactualbalancebetweenthosefactorsishighlydependentonthespecificcompany
and its surrounding environment. However, despite of numerous possible solutions, only a discrete
subsetofdifferentorganizationalconfigurationshasbeenfoundtobeadoptedinpractice.(Wood,
2005)
The main attributes differentiating organization structures are considered to be centralization and
formalization.(Wood,2005)Inourcaseofpurchasingorganization,thefirstoneimplieswhetherthe
procurementactivitiesof differentbusiness units of a company are handled by one central function
(centralized) or is every single location/site responsible for its own purchasing decisions
(decentralized)(Gadde,etal.,2001).Formalizationoftheorganizationexpressestheextenttowhich
theprocedures,instructions,communicationpatterns,etcaredocumentedinthecompanyandhow
aretheyfollowed.Itistheexistenceandprevalenceofwrittendocumentation.(Wood,2005)Those
two attributes are commonly chosen for adjustment for reasons that they are managerially easily
applicable as well as they involve both the formal and informal structure of the company. (Wood,
2005)
Centralization
Centralized purchasing organization can be found applicable in case of similarities between multiple
company locations e.g. in used technology, market conditions, purchasing problems, item demand,
etc. It is more common to occur in companies offering the same product or service in multiple
locations.(Quayle,2006)Inaddition,centralizedcontrolisfoundtobeprevailingconfigurationalso
for single site and relatively small size company where there are no feasible criteria for division of
controlandthusdecentralizationwouldprovidenobenefits.
However, decentralized purchasing solution is seen beneficial when substantial differences exist
betweenvarioussitesofonecompany.Insuchcasecentralizedcontrolwouldbeinefficientaseach
unit operates in its own area (Gadde, et al., 2001); (Quayle, 2006). Table 1 provides comparative
overviewofbenefitsanddownsidesofbothdescribedsolutions.

Centralized Decentralized
U Increasedprofessionalismofbuyers U Purchasingdepartmentsbetter
U Moreefficientallocationofpurchasingbudget contactwithlocalorganization
U Higherbargainingpower U Integrationwithotherfunctions;
U Lessordersandbiggerquantitiessavings buyersareoftenlocatedtogether
Advantages
throughadministrativecostsandeconomiesof withengineeringor
scale manufacturingspecialists
U Directandsinglepointcontactwithsuppliers U Abilitytofocusonlocalconditions
U Avoidanceofcompetitivebuyingbyparallel andadjustpurchasingactivities
departments accordingly
U Increasedefficiencythroughdevelopmentof
commonstandardsandprocedures
U Higherroleofpurchasingincorporatehierarchy
U Indirectcontactbetweensupplierandactualuser U Coordinationdifficultiesbetween
ofthecomponent/product differentsites
Disadvantages
U Increasedspecializationcanlimitpurchasing U Noclearoverviewofinbound
functionintegrationwithotherdepartment, materialflowleadingto
losingtheoverallcoherencerequirement inefficiency
U Highbuyingpowercanbeabusedbythechaseof U Reducedspecializationand
lowerpricesresultinginbankruptcyofsupplier bargainingpowerduetosmaller
andchangersinmarketstructure scaleandscopeofthefunction
Table1Advantagesanddisadvantagesofdifferentcentralizationconfigurations.BasedonGadde,etal.(2001),
Quayle(2006),VanWeele(2005)
It can be noted that total centralization and total decentralization are both extreme values of
centralizationcontinuum.Themajorityofcompaniesliesomewherebetweenthesetwoextremesto
utilise advantages of both configurations (Johnson, et al., 2004). In such hybrid structures
responsibilitiesandcontrolbetweenheadofficeandlocalorganizationaredividedwithaccordanceto
businessenvironment.Eventhoughtheexactdivisionishighlyindividualamongcompanies,thetasks
oftenallocatedtoheadofficecaninclude:
U developmentofpurchasingstrategies,policiesandstandards
U negotiationsforcommon,widelyuseditems
U stockmanagementbetweensites
U purchaseofplantequipmentandotherstrategicitems
U training
U legalmatters
U researchandinformationservice
Gadde,etal.(2001),Quayle(2006)
Theresponsibilityforlocalpurchasingorganizationswouldthusbe:
U placingordersforcommonitems
U negotiatingandcontractinglocallyuseditems
Gadde,etal.(2001),Quayle(2006)
Formalization
The issue of formalization in purchasing organizations is not much addressed in prevailing literature
which implies its relatively small effect on supply performance of companies. However, its
combinationswithcentralizationdecisionhelptodescribefouressentiallydifferentorganizationtypes
which are also suitable for defining different purchasing functions characteristics. Those include
machinebureaucracy,entrepreneurial,professional,andadhocracytypes(Wood,2005)(seeFigure
3).

Figure3Differentorganizationalconfigurations.BasedonMintzberg(1989)
Machinebureaucracytypeorganizationscontainbothhighlevelsofformalityaswellascentralization.
Thisresultsinanorganisationwithmanyformalrules,regulations,andcontrolswherealargepartof
communication existing in written form. To be able to control that regulations are followed, the
decisionmakingiscentralizedwithveryclearandhierarchicaldivisionofpower(Wood,2005).Large
multisite manufacturing firms that drive for efficiency can be good representatives of such supply
organizationtype.
In the entrepreneurial organization little of its activities are formalized. Control as well as decision
making is agglomerated to the manager which leaves little or no reasons why to formalize the
operationalcommunicationtoomuch(Wood,2005).Anexampleofpurchasingorganizationlikethis
canbesinglesitemanufacturingcompanywithcentralizedcontrolandrelativelysimpleprocedures.
The configuration can also be applied by more complex companies with a small number of central
suppliers where local units are responsible only for calloffs from those contracts which require no
extensiveformalities.
Professional organization type contains high level of formalization with the purpose of facilitating
complex procedures that need certain level of formalized control. However, as the formalization is
designed toachieve the desired outcome from its members, all professionals share decisionmaking
authority in this configuration. In general, it is considered to be suitable setting for hospitals and
universities. (Wood, 2005) In our case of purchasing organization, it fits to a development intense
multi site MTO type of company with heterogeneous supply demand where contracts are done
autonomouslyatdifferentlocationsduetodifferentorchangingcharactersoftheproduct.Also,such
configurationissuitabletodescribetheheadofficelayerofcentralizedorhybridsupplyorganization
corporatebuyerswithhighspecializationandautonomousdecisionmakingpower(VanWeele,2005).
Adhocracystructureislowinformalizationandwithdecentralizeddecisionmaking.(Wood,2005)As
all previous types, there are environments where such design can be considered an appropriate
solution.Itfacilitatesfastresponseandflexibilityintheprocesses.However,itisratherdifficultstate
to control due to tendency for anarchy and poor coordination. It might be suitable for R&D intense
developmentorganizationswherepurchasingactivitiescanbecomplexandunconventional.
This clustering allows general positioning of the organization. As also hinted in the description of
professionalorganizationtype,differenttypescanbeexistindifferentlevelsofcentralizedorhybrid
purchase organizations i.e. head office and local units. Such classification might not be particularly
usefultoknowforbuyingcompanyitselfasmoreimportantistheactualalignmentwiththerestof
organizationandnotwhichclusteritfallsin.Ontheotherhand,itmightprovetobegreatvaluefor
selling companies where such grouping can give useful insight how decisionmaking and power is
dividedinpurchasingfunctionandthusallowstopushtherightbuttonsbyfocusingsaleseffortto
rightpositions(Wood,2005).
There is no checklist available concerning decisions for designing most appropriate purchasing
organizationi.e.inwhichsquaretobeonthatgraph.Thesolutionishighlycontextdependentandthe
contextishighlyvolatilewhichleadstocontinuousneedtomonitorandconfiguretheorganizational
structure(Gadde,etal.,2001);(Johnson,etal.,2004).
Dynamics
Anorganizationalstructuremustbeabletochangeinordertocopewithoutsidepressures.However,
there are several views on the dynamics of organizational structure. It is suggested as being
progressive with different organizational types evolving over time. Also cyclical and oscillating
patternsbetweendiscretenumbersofconfigurationshavebeendescribed.Butthebottomlineofall
of those views is that managers reform the organization in order to enhance the performance and
despite the fact whether such configuration has been used before. (Wood, 2005) According to
Johnson, et al. (2001) and Wood (2005), it is not proven that CPOs restructure or design the
organizationdrivenbyandbasedonananalysisofavailablealternative.Suchreformsareinitiatedby
pressurescreatedbychangesinexternalenvironmentwhichinfluencecorporatestrategy.Thatinturn
necessitates adjustments in corporate structure which inevitably brings along changes in supply
organizationtomaintaincoherencethroughouttheentirecompany.
Such hierarchy of events leads to two important considerations regarding the design of purchase
organization. First, as adjustments to organizational issues are done with the purpose of improving
cost structure, even when changing back to setting that has been previously used. That means no
perfectorganizationaldesignexistsbuttheusefulnessisdeterminedbyexternalconditions.Second,
as changes are not triggered by managers, but rather external pressures, internal problems, or
combination of the two, there is a certain lifetime for one organizational structure (Johnson, et al.,
2001).Itisjustamatteroftimebeforethecurrentconfigurationisoutdatedagain.
Comingbacktothemodeloffourorganizationtypes,thosetwoconclusionsimplythatcompaniesare
not determined to be in the matching square for eternity. The position changes over time. As
companies grow, they can, for example, move from entrepreneurial towards machine bureaucracy
duetosimpleincreaseinpeopleandvolumes.Bychangingstrategyordevelopingsupplierrelations,
companies can become more development centred with professionaltype structure or even
downgradetoadhocracytype.Companiescanapplyseveralmodelsindifferentlayersoftheirsupply
organizations enabling even more directions for a change. The movements in the graph dont
necessarily have to cross category borders but also shifts towards certain direction can indicate an
importantchangeforthecompany.
Expressingtheongoingtrendsofincreasingcentralizationandreducingthenumberofsuppliersinthe
light ofthismatrix,the shift to right side ofthe graph towards centralization could probably be
detected in all clusters. The change in terms of formality is probably multifold, especially in hybrid
structures,andshiftsingraphwouldexpressvariousdirectionsdependingonbusinessenvironment
makingitdifficulttodetectanyclearpatternexceptforthefactofchangeitself.
However, it is important to differentiate between the essential drivers behind the shift towards
another configuration. As described previously, it can be the result of already changed external
factors. In that case, the management of purchasing organization deals with consequences by just
tryingtoavoidfurtherdamageswithfastreacting.Itresemblesdrivingacarthroughtherearwindow
whereupcomingcurvesontheroadarerecognizedwhentherideisalreadyverybumpy.
Inourviewitwouldbehighlywelcomedifthedynamicsoftheorganizationcouldbemorecontrolled
intermstimingandplanningthechangeaccordingtofutureforecasts.Inthatwayminoradjustments
inorganizationaldesign can keep theprocesseswellon track andcan avoid costly restructurings of
theentireorganization.Despitetheseeminglackofresearchonthattopic,theissuesseemstocome
infocusofpractitionersasstatedbythestudyofJohnson(2004)thatcopingandprosperingdespite
and, perhaps, because of change, may be the CPOs ultimate test. As change management regarding
externalandinternalfactorsbecomesrecognizedpartofPurchasingManagement,theimprovements
towardscontrolleddynamicsmaybeunderway.
Otherorganizationalfactors
Once the organizations structural model has been decided, the frame for working conditions and
formal communication has been set. It defines the shape and orientation of the function but not
whats inside. Therefore the next step in organizational design is filling the structure, which also
addsfewcriticaldecisionstotheoveralldesignprocess.
Previously outlined trends in purchasing practice indicate the increasing strategic role in corporate
policy. Along with that comes the need for higher alignment in corporate hierarchy which in turn
results in higher reporting level of the CPO. This trend needs to be taken into consideration when
designingastructure.StudiesbyJohnson,etal.(1998)andJohnson,etal.(2004)notethatinorderto
achievethecapabilitiesofstrategicplanningandresponsibility,anorganizationmusthavesomekind
of centralized control over its processes and prove that purchasing organizations classified as
centralized, and also hybrid, have higher rate of participation in major corporate activities than
decentralizedsupplydepartments.Thustheseeminglyexternalfactorofpurchasingpositioninginside
the company correlates to structural design decisions in a very good way increased centralization
facilitatesthehigherreportinglevelofaCPO.
The same study indicates another factor which, in terms of organizational structure, might seem
irrelevant at first glance the background and characteristics of the CPO. Managers with higher
corporate positions and those with relevant work experience demonstrated wider use of various
purchasing techniques, e.g. crossfunctional teams, supplier and customer involvement teams, co
locationofbuyerswithotherfunctions.Thosemethodscansignificantlydeterminetheactualformal
as well as informal communication structure in the purchasing organization along with division of
labourandcontrol.Thereforethequestionhowmanagingpositionsinpurchasingfunctionarestaffed
mustalsobeconsideredinthedesignprocess.
Amongotherdecisionsaffectingthewayinwhichapurchasingorganizationworksisthequestionof
divisionofwork.Asoutlinedinthebeginningofthischapter,theongoingtrendisformalisingbuying
groups around end items rather than commodities. However, the bottom line is that this division
shouldbedoneonlogicalbases,whetheritisbasedoncommodities,geographicallocation,orother
factors (Quayle, 2006). As specialization on one category alters the efficiency of the others, the
divisionshouldbemadewithconsiderationsto:
U practicalandtechnicalfeasibilityofdividingthelineofwork;and
U subtasksshouldnotseriouslyimpactthevaluesofothersubtasks.
(deBoer,etal.,2003)
Inpurchasingorganizationthatcanbeinterpretedas,forexample,groupingaroundenditemsshould
be easily supported by the organizational structure. The benefits of such a configuration should
overweightthenegativeimpactofchangesincommodityandgeographicallevel,i.e.itdoesnotalter
functionalityofsupplying.
Forexample,(VanWeele,2005)suggestsadivisionoftasksbetweenthefollowingfunctions.
Function Responsibility
Corporate
procurement Developingcorporatepurchasingstrategies,systems,reporting.
officer(CPO)
Strategic commodities large volumes, high investment projects and services.
Corporate
Responsible for developing sourcing strategy for key commodities. Long planning
buyer
horizon.
New materials and components. New suppliers. Discussing spec.s, market research,
Purchasing
selection of suppliers, negotiations. Work on decentralized level. Liaisons between
engineer
purchasingandR&D.
Projectbuyer Similartopurchasingengineerbutfocusonequipmentandservices.
Materialsplanningandordering,orderhandlingensuringmaterialsupply,callingoff
Material
materials against annual agreements. Vendor rating monitor and control suppliers
planners
qualityanddeliveryperformance.
MROsuppliesmanagementoftheentireassortmentofMROitemswithregardto
MRObuyer
overallperformanceratherthanjustpricefocused.
Table2Buyerprofilesanddivisionofresponsibilities.BasedonVanWeele(2005)
As for the organizational structure, it is difficult to state the correct division. It can vary through
different strategic levels of the organization (de Boer, et al., 2003)or be uniform for the entire
department. The overallprincipleisthat the solution must providesatisfactoryprofit and align with
corporatevaluesandpolicy.
Theliteraturehasalsoimpliedtheincreasinglevelofintegrationofpurchasingfunctiontoexternalas
wellasinternalenvironment,i.e.tosuppliersandcustomers,andotherdepartmentsofthecompany,
accordingly(Trent,2004).Commonmethodsoffacilitatingsuchinteractionarecrossfunctionalteams
including various counterparts related to end product, colocation of buyers and other specialists
(engineering and manufacturing), supply councils, etc. The study by Johnson, et al. (1998) also
indicatestheinfluenceofcentralizationdecisionsontheuseofthosetools.Theirconclusionisthatin
centralized and hybrid structures the implementation of those methods is more common than in
decentralized organizations. However, the connection between organizational structure and the
tacticsofcarryingoutthetasksexists.
Summary
The idea described in this chapter about organizational configuration of supply function is simple
structural design affects the performance of purchasing to substantial extent and should be paid
considerationbydecisionmakersinthecompany.Itmusthaveagoodfittotherestofthecompany
structure and facilitate the activities necessary for competitive purchasing. More important, the
changing character of the best fit necessitates the understanding and consideration of ongoing
trendsinsupplyfunction.
However, the solution in this matter is not simple. One can, and should, consider, among other
factors,attributeslikecentralization,workdivision,orformalizationtoachievebetteralignmentwith
surrounding environment. Nevertheless, as repeatedly stated in the text, there is no uniform
configuration or checklist available to download and implement in all situations. The organization
mustbecontinuouslyadjustedinaccordancewithexternalforcesandcorporatepolicy.
As purchasing has gained strategic value rather recently, the management still seems to be seeing
business dynamics through sort of a back window, reacting only when the changes has already
occurredandcopingwithconsequences.Intermsoforganizationaldesignthereseemstobealong
waytogotocontrolthesurroundingenvironmentasbeingabletopredictthedynamics,prepare
the structure and processes in the organization, and synchronize the changes in organization with
changes in external environment. However, as the studies have revealed the understanding of the
importanceofchangemanagementinbusinesspracticeandalongwithincreasinglystrategicroleand
closercollaborationwithsuppliers,wecanhopetoseeimprovementsinthatfrontinsoonerfuture.

Internal Collaboration 21
[3] InternalCollaboration
Strategic purchasing is most often
associated with external relations.
However, purchasing integration and
internal collaboration are the enablers
of every corporate strategy. The aim of
this chapter is to explain the
connections between purchasing and
the companys competitive priorities as
well as emphasize the need for
interdepartmental collaboration.
Introduction
Many literature sources across disciplines have described collaboration as interaction, where
communication in the form of meetings and information flows are employed to bond departments
(Souder, 1977), (Trent, et al., 1994). Communication by way of task forces was always an important
integration mechanism during the startup and final stages of product development. Souder (1977)
definestheinterdepartmentalcollaborationasAstateofhighdegreesofsharedvalues,mutualgoal
commitments, and collaborative behaviours. Nowadays companies more often send to the markets
highlycomplexproductsandrelatedservices.Itallrequiressolidexternalactionsbutalsonecessitates
closecooperationbetweendepartmentswithinthecompanywhereeveryonehascommongoalsand
understandstheimportanceofcommunicatingwithothers.
Importanceofinternal
collaboration
Interdepartmental interaction represents the communication aspects associated with activities

performed by different departments within a company. Such activities address verbal and
documented information exchanges between specific sides; therefore they correspond to both
tangible and intangible assets of the company (Trent, et al., 1994). All the activities should be well
structured, clarified and standardized whenever it is possible. If the work division is not clear
employeesmaybecomeconfusedovertheirrolesinthecollaborationprocessesthatcancontribute
tofrustrationandseriouscorporateproblems.Also,ifinefficient,collaborationcanbetimeconsuming
and can impact negative outcomes i.e. lack of agreement and understanding between leaders and
other participants (Shani, et al., 2008), (Trent, et al., 1994). Therefore it is necessary to define the
meaningofcollaborationineachcompanyandsetthestandardsforeffectiveinformationsharingand
integration.Asmentionedinchapter [2],purchasingorganizationshouldbetheenablerforeffective
internal cooperation as well as collaborative with other departments i.e. by using crossfunctional
teamsandleadership.Theconceptofcrossfunctionalteamshasbeenlatelybroughtupasanefficient
tooltomanageexpectationsofthedepartmentsandthecompany.Whileitisfairlysimpleintheory,
itspracticalimplementationisveryoftendifficult.Alotoffirmsmustchangetheirbusinessbehaviour
and overcome previously established functional structures of reporting and sharing information.
Powerfulcrossfunctionalintegrationrequiresacorporatecultureofparticipativeteamworkwithinall
companyslevelsandacrossdefinedfunctionallimitations.(Trent,etal.,1994)
Itisimportanttodefineresponsibilitiesofpurchasingorganizationandotherorganizationinsidethe
company e.g. manufacturing, R&D, logistics, marketing. Therefore there should exist so called
departmentspecificactivitiesinordertoclearlydefineinternalcompetences.Someofthemwould
be interrelated but the rest would reflect low interdepartmental interaction and low
interdepartmental collaboration, since activities would be internal to the department. Nevertheless,
introduction of new products and product changes very often requires collaboration of several
departments. In such cases the purchasers knowledge should be supported by engineers, a
developmentteamandsalesrepresentatives.Itisthecommonviewthatprovidesthebestdecisions
andresults.(Kahn,etal.,1996)
Followingthediscussionitcanbestatedthatpurchasingintegrationinvolvestheactiveparticipation
ofpurchasinginthestrategicdebateinthecorporationandisaimedatpromotingthealignmentof
purchasing practices and goals with strategic business priorities. Purchasing integration relates
purchasing plans and practices to business vision, and shapes senior managements perceptions of
procurementsstrategicroleinthefirm.(Narasimhan,etal.,2001)
Someofthefieldresearchers,however,arguethatsometimesinterdepartmentaldiscussionmeetsa
lot of problems. Collaboration is understood as an involved process where employees may not be
productive because of time and resource spent to take part in crossfunctional training and related
activities. Such actions without immediate results might be undesirable from upper managements
perspective.Thinkingintermsoftransactions,departmentsareconsideredtobeindependententities
that may compete for companys resources, and the collaboration between specific departments is
considered to be occasional and costincurring. Due to competition and perceived costs, managers
view meetings and information flows with other departments as negotiations, where each
department tries to get the best deal at the conclusion of the meeting or information exchange.
(Kahn,etal.,1996)
It is important to point out that the level of purchasing success and the following success of the
company depends on the fit between the companys functions. In case of purchasing initiative, a
structure should be established to enable cooperation with other departments. The departments
shouldgiveeachotheramutualsupportinordertoimproveoverallcompanysperformance.When
settingupcollaborationprocesses,issueslikedivisionofresponsibilities,fieldsupportandinformation
sharingshouldbedetermined.Byestablishthepurchasingdepartmentsfitintothecompanysother
functions it also creates a support for already established collaboration to improve and deliver
outcomesthatareinfavourforthebusinessperformance.Further,itcanbeobservethatthelevelof
involvement of purchasing organization depends on a project and its complexity. Sometimes the
internalfocusofaprojectmaylieinotherdepartmentse.g.manufacturingandproductdevelopment.
Despite the less important role of purchasing in some cases, it is still necessary to exchange
knowledgeandexperienceinordertosuccessfullycompletetheproject.
Purchasingcollaborationwith
otherdepartmentswithinthe
internalorganisation
Itcanbestatedthatpurchasingworksasanintermediarybetweensuppliersandthefocalcompany
and takes a role of a relationship manager. It should have the ability to communicate effectively
including the potential contributions to design and technology experts internally. It is important to
point out that the purchasing department does not have to coordinate all of the contacts with
suppliers. Other important departments like Research and Development (R&D), Manufacturing or
Sales may have the main and significant knowledge about a product and supplier market. In this
context,aclosecollaborationbetweenthedepartmentsiscrucial.Thepurchasingorganizationmay
notconstantlyplayamajorrolebutitshouldalwaysberesponsibleforsupplierselection,contracting
and monitoring as well as maintaining right relationships. The following sections will describe the
purchasing departments collaboration with other departments in the organisation. These
departmentsare;R&D,manufacturingandlogistics.
PurchasingR&Dcollaboration
Purchasinginvolvementinresearchanddevelopmentactivitieshaslatelygrownintoamorestrategic
issuethaneverbefore.Apartfromtheinternalclosecollaborationbetweendepartments,firmslook
for supplier capabilities in engineering, design, testing, manufacturing, tooling, delivery and
responsiveness. This new approach has been described by Narasimhan et al. (2001), which indicate
that with the assurance of increased volume commitment and increased familiarity with a wider
assortment of parts, suppliers can focus on design and process improvements. Taking into account
thisreality,theroleofpurchasinginvolvementinproductdevelopmenthasincreasedalot.Morethan
ever, the interdepartmental collaboration within research and innovation is essential for the
companyslongtermsuccessandprofitability.Leadershipandjoint problemsolvingimplementedin
purchasing organization are the tools to support developing critical products and process
technologies.(Narasimhan,etal.,2001)
Purchasingpracticesmayinvolveextensiveinvestmentsanddevelopmentsuchasqualitytrainingfor
suppliers, organizational change towards integration, developing strong internal ties through
membership in strategy development teaming, information sharing, and joint decisionmaking
activities. The total costs tied up into these undertakings may be lowered by an efficient internal
collaboration and planning. Further, these benefits can contribute to longterm profits and solid
business establishment. For instance, the design for manufacturability can achieve leadtime
reduction, better quality, less rework and cost reduction. An effective collaboration between
purchasingandproductdevelopmentcanleadtobetteroverallmaterialsmanagementindownstream
processesinsidethecompany.Bonaccorsi,etal.(1994)concludedintheirfieldresearchthatanearly
involvement of purchasing organization can enable efficient research within relevant suppliers and
improve a companys performance in the future. However, it can only be achieved when the
purchasinginvolvementandcollaborationismanagedcarefully.(Bonaccorsi,etal.,1994)
MostoftenthecollaborationprocesswiththeR&Ddepartmentinvolvescontactingcompanysengineers
regarding specific components, materials and technological solutions. Typically, growing degrees of
projectinnovationandcomplexityareexpectedtoleadtotheincreasinginvolvementofpurchasers.The
level of purchasing contribution in product development can be diverse e.g. on parttime basis, full
timebasisandprojectcoordinationrole.(Lakemond,etal.,2001)
According to the same author there must exist several factors that drive the need for purchasing
collaboration:
1. The presence of an internal organization that is able to support communication and

coordinationinproductdevelopment
2. Thecompetencesandsillsofthepurchasersintermsofpersonnelwiththerighteducation,
skillsandexperience;understoodaswellestablishedpurchasingorganization
Figure4Configurationsofpurchasinginvolvementinproductdevelopmentprojects(Lakemond,etal.,2001)
Figure 4 presents different organizational mechanisms that have been suggested to coordinate
functional interfaces between the departments of an organization. Purchasing can for instance
becomeinvolvedinaproductdevelopmentprojectbasedondirectcollaborationbetweenpurchasers
ordevelopersandengineers.Thepurchasingisnotreallyintegratedintheprojectteambutisinvolved
occasionallywhenthesupportisneeded.Generallyspeaking,thecollaborationmayhaveadedicated
basis (purchasers work full time in the development projects), a parttime basis (operational
purchasing)oracoordinationrolewheretheprojectworkissupportedbythepurchasingteamfrom
thedepartment.(Lakemond,etal.,2001)
Figure5Theregionalpurchasingofficeforaregionalsupplybase(Lakemond,etal.,2001)
Figure 5 presents another approach that is common for global companies. Increasing competition and
marketrequirementsputmoreconditionsinmanyindustries.Once,aDutchmanufacturerofcopierand
printingsystemsestablishedaregionalpurchasingofficeinAsia,inordertoreducetimetomarketofnew
products, decrease costs and intensify monitoring global development activities. Initially, the external
supplier base was aimed at investigating the Asian supplier market. However, later it moved towards
setting up a purchasing specialist role with the responsibilities of an account buyer and regional
purchasingmarketresearcher.(Lakemond,etal.,2001)
PurchasingandManufacturingcollaboration
Thereexistsastrategicandmeaningfulrelationbetweentheactivitiesperformedbypurchasingand
manufacturing departments. Thoroughly selected suppliers and close relationship with them can
support production efficiency and reliability. Watts, et al. (1992) emphasized the importance of
achievingcongruencebetweenpurchasingobjectives,actionplans,manufacturingandbusinessgoals.
To accomplish this, purchasing must be a full participant in business strategy formulation and
implementation.Integrationhasbecomeanewcorecompetenceforalotofcompanies.Inthispartof
thebook,thecentralargumentisthatawellalignedpurchasingstrategyhasacrucialimpactonthe
achievementofmanufacturingandoverallbusinessgoals.
Figure6PurchasingandmanufacturingintegrationHypothesisedmodel(Narasimhan,etal.,2001)
The simple model presented on Figure 6 shows purchasing integration and purchasing practices as
havingamaininfluenceonmanufacturingperformance.Forinstance,apositiveconnectionbetween
purchasing practices and manufacturing activities may be maintained by supplier integration and
supply base management. Besides, purchasing integration can enhance the alignment between
purchasing practices, and manufacturing and business priorities, making it easier for purchasing
departmenttocontrolmanagementattentionandsecureorganizationalresources.Itisreasonableto
arguethatbesidesaffectingmanufacturingperformance,purchasingintegrationcanactuallypromote
investments in purchasing practices that impact manufacturing performance (Narasimhan, et al.,
2001).EfficientcollaborationbetweenthesetwodepartmentswithcooperationofR&Dcanpositively
affectcostreductionandqualityperformance.Joindecisionmakingprocessesenablebuildingavalue
chainfromintroductionofnewproductstocustomizationandreliabledelivery.
It is important to understand that some of the purchasing strategic decisions i.e. supplier selection,
contractingandsupplierevaluationarenotpossiblewithoutclosepartnershipofthemanufacturing
department. Very often it is the engineering knowledge that affects external collaboration with
suppliers and enhances searching for new product possibilities. In corporate reality, it is the
productioncompetences,capacitiesandefficiencythatdeterminesupplierselectionandrelationships.
When it comes to manufacturing performance some of the new trends can be investigated. In the
reality ofthecustomer in focus and customization such strategies likeengineertoorder or buildto
orderhavebeenbroughtup.Companiestendtocuttheiroverallsupplychaincostsaswellastryto
meet volatile customer expectations. Effective supplier relationship and performance support these
strategies and enable high manufacturing efficiency. Besides, when introducing these new trends,
close collaboration and information sharing is necessary i.e. supported by a system of order entry,
customermonitoring,manufacturing,procurementandfinance(Narasimhan,etal.,2001).
Nevertheless, surveys made in firms in production and service industries have shown a different
perspective of purchasing integration. Accordingly, top management has low expectations of
purchasing contribution into market planning, forecasting, innovation of products and strategy
formulation. Most probably, it is because of lacking collaboration between departments, lack of
commitment and a holistic view of the company. At the same time, large portion of the companies
start to shift from the routine treatment of purchasing to proactive, crossfunctional and more
collaborativerole(Petersen,etal.,2005).
PurchasingandLogisticscollaboration
Maintainingefficientandontimesupplychainhighlydependsonthelogisticsperformance.Supplier
relationships and strategies determine logistical actions and put a challenge on the logistics
department to perform costefficient and wellplanned activities. In general logistics operations
depend on geographical location of suppliers, type of goods, packaging and carriers as well as
administrative issues. Demanding customers and costefficiency issues has lately put one more
constraintonthelogisticsandtransportationanditisJustInTime(JIT)approach(Christensen,1996).
Anenablertofulfilalltherequirementsistheclosecollaborationbetweendepartmentsandmutual
support. Purchasing organization should be aware of all the logistical issues when setting up new
supplierstrategies.Herethefocusshouldbeonscheduling,forecastingandpositioningofinventories,
capacityplanningandtransportdistances.Thepurchasingteamshouldsupportthereleaseoforders,
quantity controls and scheduling. There are also a lot of visible benefits for buyers when they
implement JIT purchasing. This includes reduction of the carrying costs for components, transport,
rework, ease of expediting, fast detection of defects, fewer suppliers for contracting, less need for
inspection, quick response to engineering changes (Schonberger, et al., 1984). By crossfunctional
discussion the proper form, locations and shipment parameters must be discussed. Collaborate
capacityplanningmustbedoneinordertomaximizeutilizationofvehiclesanddecreaseamountof
wastee.g.waitingtime,damagesandshipmentofwronggoods.Petersen,etal.(2005)emphasizes
that collaborative actions require greater communication and information sharing between internal
and external organizations. Also, he states that the collaborative planning can be expected to
necessitatethattheinformationsharedisofhighquality.
Wellorganizedandplannedlogisticsactionsveryoftenhaveahighlevelofuncertainty.These,dueto
that many global businesses have faced the consequences of an increase in the distance between
buyer and supplier and higher complexity of transport networks. The purchasing organization that
works as an internal intermediary can support upstream and downstream activities in order to
increasepredictabilityandsetaccurateandrealisticschedules.
Informationsharingstructures
Directcontactbetweenemployeesfromdifferentdepartmentscanbeenabledbycreationofspecial
collaborationrolei.e.apersonbelongingtooneoftheinvolveddepartmentswiththeresponsibility
for communicating and achieving coordination between the departments. A project manager is an
example of a fulltime integrator. Another possibility is creating a task force as a committee where
certain issues are discussed by department representatives. The most permanent option is cross
functionalteamsoftencombinedwithprojectmanagersactions.Thiswillmostprobablyfitintothe
productdevelopmentactivitiesthatareveryoftencarriedoutinteams(Lakemond,etal.,2001).Such
activities address verbal and documented information exchanges between specific sides, including
meetings, fax, teleconferencing, memoranda, conference calls and transmittal of standard
documentation.Bymanypractitionersinteractionisconsideredasatangibleassetandcanbeeasily
monitored.(Kahn,etal.,1996)
Carter,etal.(2000)statedthat:
Electroniccommercetechnologywillsupportelectronicefficiencyefforts.Avery
powerful communication integration is underway matching future
improvementsintheWebwiththeadoptionofenterprisebasedsystems.
The trend comes from an increasing need for efficient and integrated decisionmaking processes as
well as service and product fulfilment to the customers. A lot of firms have decided to use the
Internet,commondatabasesandelectronicaccesscataloguesforfastandreliableinformationsharing
as well as to support their business strategies e.g. Vendor Managed Inventory (VMI) or Poolbased
systems. Such electronic solutions enable integration and collaboration between the departments
insidethecompany.Internet,EDI(ElectronicDataInterchange)messagesandEnterpriseRequirement
Planning (ERP) systems are very often utilized in order tracking, financial transfers, production
planning and scheduling, invoicing and other corporate activities (Gimenez, et al., 2008). The use of
EDIandInternetinpurchasingwillbefurtherdescribedinchapter[8].
When it comes to purchasing decisions supplier databases are created in order to keep track of
supplier performance and enable future evaluation. Such information may be used by other
departments like product development, production and logistics in order to support their planning
anddecisionmakingprocesses.TheInterneteraisnowvisiblenotonlyinsideonecompanybutalso
along supply chains in order tomaintain global profitable strategies. Managers have realised that e
solutions can enhance SCM decision making by providing fast information and enabling external
collaborationoftradingpartners(Gimenez,etal.,2008).
InoneofhisarticlesCarter,etal.(2000)hascreatedavisionforfuturecollaborationandimportance
ofpurchasingorganization:
Strategic purchasing competency centres will be established at dominant

companies with highly trained personnel who study their supply chains and
searchforopportunitiestoachievecompetitiveadvantagethroughtheirchoice
ofsupplychainpartners;determinationofcorecompetencies;andinfluenceof
design,manufacturing,operationsandsourcing
Conclusions
For many business representatives and supply chain practitioners purchasing is considered as a
representationintoplevelmanagement,integratedwiththesupportfromcrossfunctionalteams.In
addition it is considered as having a meaningful contribution to competitive goals and overall
corporate performance. Another group of researchers has however discovered that the role of
purchaserscomesdownonlytotacticalandsupportingresponsibilities.Bothstatementsseemtobe
relevant,althoughitveryoftendependsofthecomplexityofthecorporationandtypeofbusinessit
performs. What we feel confident of is that purchasing organization is an important link inside the
organizationandinternalcollaboration.Itplaysamajorroleinmaterialsmanagementandinformation
sharingandsupportsotherdepartments,withtheclosecooperationwithmanufacturingandproduct
development.Whenever,internalcollaborationissuesarediscussed,itisimportanttopointoutthata
cleardivisionofworkandresponsibilitiesmustbedone.Allthedepartmentsshouldseeitassharing
ofrisksbutalsomutualhelpandrewardsharing,withthecompanyssuccessinfocus.
Afterreviewingmanyfieldstudiesandindustryexampleswestronglysupportthestatementmadeby
Ellram,etal.(1994):
Purchasingplaysakeyroleinsupplychainmanagementthroughitsintegration
with production, scheduling, logistics, sales and accounting/finance. It has a
proactiveroletosupporttheoverallstrategicplanandisregardedasanequal
partofthecorporateteam.
Sourcing Strategies 31
[4] SourcingStrategies
Sourcing is the activity of securing
external components or services
needed within the own internal
organization. Companies employ
different kinds of sourcing strategies
and no one is declared to be the
optimum solution. Outsourcing which is
the foundation to choice of sourcing
strategies also intends to align with a
companys core competence focus.
Important parts of sourcing strategies
are for example the choice of location,
size and relationship level within the
supplier base. Sourcing strategies also
often deploys continuous improvement
and re-evaluation of suppliers.
Introduction
As defined earlier in the book, purchasing has, according to the trends, become more strategically
importantforcompanies.Theimportanceofsuppliersandpurchasing/sourcingincreasedsignificantly
duringthe1990sandwasacknowledgedbyexecutivemanagersbytheendofthedecade(Trent,et
al., 1998). This means that more emphasis has lately been taken to the sourcing strategies of the
companies.
One example of this was when General Motors developed their concept Strategic Sourcing in the
1980s.StrategicSourcingisaninstitutionalprocurementprocessforcontinuousimprovementandre
evaluationofthecurrentpurchasingactivitiesinacompany.Supplierdevelopmentcanalsobeviewed
asastrategicsourcingtool.Thecurrenttrendsinthisareaaretowardmorecomplexityinsupplier
assessment whether by using finer and finer details level in the examinations or by use of
individuallydefinedmetricsforassessingaspecificsuppliersperformance.(Cavinato,etal.,2000)
Nishiguchi (1994) in his book, Strategic Industrial Sourcing, has defined seven steps for strategic
sourcing:
1. Currentexpendituresevaluation
2. Supplymarketsevaluation
3. Sourcingstrategydevelopment
4. Appropriatesuppliersidentification
5. Negotiationswithsuppliers
6. Executionofnewsupplystructure
7. Resultstrackingandreevaluations
Asourceisliterallydefinedasthepointtopurchasetheinputstoproducegoodsorservices(Hugos,
2006).Sourcingisdefinedastheactofsecuringparts,supplies,materials,services 1andotheritemsto
support production. Companies purchase resources from different locations, based on the scope of
theiractivitiesorservices.Domesticcompaniesusuallygoforlocalresourcesevenifthecostswould
be greater than purchasing from a foreign country. On the other hand, global companies locate
resourceswhereverthecostisthelowestwithrespecttotheoverallcostdedicatedtotheirfinished
product.OneexampleforlowlabourcostcountriesisMexico;amultinationalcompanymaylocateits
assemblylinethere,butstilltransporttherawmaterialsfromSoutheastAsiaforthelowestpossible
cost(O'Connell,2005).
Onedominantsourcingstrategyisnotrationalthroughoutaportfolioofpurchaseswheretheremight
be willingness to compete among the various suppliers in some categories and in the others, there
mightbehardlyanysuppliers.Somecategoriesmightbemoreimportantthanothersespeciallywhen
1
The labor sourcing and staffing activities are basically taken as human resource management
activitiesandarebeyondthescopeofthischapter.
comparing their effects in total expenditures or on the competitiveness of end products. These are
thefactsthathavetobeconsideredwhenasourcingstrategyforacategoryisbeingdecidedupon.
(Cavinato,etal.,2000)
Companiesprocessesrangefromfunctionaltostrategic(Seshadri,2005).Sourcingstrategyisdefined
astheapproachdevelopedbythecompanytoprocuresupplies,forwhichfourelementsaredefined
as: the buying policy, the number of sources, the type of source and the nature of the company
supplierrelationship(Nicosia,etal.,2006).ThisisshowninTable3below:

Table3ElementsofSourcingStrategy,(Nicosia,etal.,2006)
Sourcingstrategiesareperceivedasassetsinaccomplishmentofcompanysoverallgoals(Nicosia,et
al., 2006). This chapter mainly defines different sourcing strategies such as global sourcing, out
sourcing,andmultiplesourcing.Thesubsidiarypurposeistoprovidereaderswithinitialpictureofthe
advantagesordisadvantagesconnectedwitheachstrategy.
GlobalSourcing
Globalsourcingisasourcingstrategywiththeintentionoftakingadvantagefromglobalefficienciesin
thepurchasing(O'Connell,2005);initiallydefineasadefensivetactictowardlowerpricesofforeign
products(Cavinato,etal.,2000).Inotherwords,globalsourcingcanbedefinedasstrategicsourcing
intoday'sglobalsetting(O'Connell,2005)whereinternationalsupplymanagementplaysakeyrolein
companiesoverallcompetitiveness(Cavinato,etal.,2000).
Acompanythatinvestigatesforfeasibleplacestofindresourceswhichcansupportitsproductionis
in fact employing a global sourcing strategy. Basically, existence of Global sourcing is due to supply
andpricedifferencesindiverseresources.Itisalsoclearthatwhenlocalsuppliesarenotsatisfactory
or the relative costs are very high, the firm begins to look for possible options in other places.
(O'Connell,2005)
Theglobalsourcing,similartomanyotherconcepts,comeswithspecificbenefits(anddisadvantages)
whichcangobeyondtheinitiallowercost.Suchbenefitscaninclude:thelearningofpossiblewaysto
do business in a potential market, acquirement of international skills or access to resources which
might not be available locally, stimulate competition through development of alternate supplier or
vendorsources,andcapacitygrowthofthetotalsupply.(Tsay,etal.,2008)
Incontrast,whileworkingwitheachcountryentailsspecificcomplexitiesandisunique,therearerisks
associated with global sourcing. There are five key drivers shaping the global purchasing industry
(Cavinato,etal.,2000):
1. Politics
2. Infrastructure
3. Currency
4. Climate
5. Culture
Another issue might be the alignment of the sourcing strategy and the companys other main
strategies,incaseslikejustintime(JIT)production,theproductionstrategyiscompletelyinfavour
oflocalsuppliers(Burt,etal.,1996),especiallyiftherewouldbehighvariationintheneededsupplies.
Anumberofmajordrawbackswithglobalsourcingcanbe:increasedtransportationcosts,increased
possibilitiesofsuppliesinterruptionwhichcanbecausedbynaturaldisastersorpoliticalproblemsfor
example, alsolongerleadtimesand possibility for delays caused by weather problems for example,
dependency on foreign sources of supply (O'Connell, 2005), and unexpected disastrous situations
causedbychangeinthepoliticalclimateorweatherforexample(Cavinato,etal.,2000).
Globalsourcingdisadvantagesmightalsoincludethehiddencostsconnectedwithculturaldifferences
andtimezones,financialandpoliticalrisksduetochangingeconomies,increasedriskofintellectual
propertyloss,andincreasedmonitoringcostsincomparisontodomesticsupply.(Tsay,etal.,2008)
Lowcostcountrysourcing
Lowcost country sourcing (LCCS) is mostly considered under global sourcing as a broader category
foraspecificseriesofprocurementactivities.InLCCS,thecompanylocatesmaterialsincountrieswith
lower labour and production costs which lead to cutting operational expenses. The key principle
behind LCCS is to achieve sourcing efficiencies by identification and utilization of the cost arbitrage
amongdifferentgeographies(Rae,2005).ThespecificproblemwithLCCSistheefficientvolumefor
transportationthatcompaniesareforcedtoorderfromareaslikeAsia(Hugos,2006).
Common examples of globally sourced products or services can be: labourintensive manufactured
productsproducedinChina,lowcostEnglishspeakingcallcentresandlowcostprogrammersITwork
inIndia(Li,etal.,2008).TheseexamplesareforLowcostcountrysourcingonlywhileitisimportantto
note that global sourcing is not limited to lowcost countries. New studies show shifts toward
knowledgeanddesignsourcinginhightechcountriesinEuropeforexamplebyAsiancompanieswho
feeltheneedforoutsourcingthesecategories(Tarek,etal.,2002).
OutsourcingInsourcing
Outsourcing,incontrastwithinternalsourcing,isdefinedbytheactofpurchasinggoodsorservices
from an external source. Internal sourcing mainly aims at internal production or purchasing from a
subsidiary of the organization (O'Connell, 2005) or in a comparative perspective, bringing activities
backintothecompany(Cavinato,etal.,2000).Thestrategyisusuallyfunctionalbasedonadecisionto
shiftfromaninternalsourcetoanexternalone(O'Connell,2005)i.e.answeringthefamousmakeor
buyquestion(Burt,etal.,1996).Theissueisbecomingincreasinglycritical(Burt,etal.,1996)because
it is mainly in favour of focusing on core competence in nowadays fastmoving market and
increasedcompetition(Hugos,2006).Thedecisiontobuyispracticallymadewhenitisdemonstrated
that competing firms possess superior capabilities that leave no chance of catching up, and/or
competitorsareachievingsuperiorperformance(Cavinato,etal.,2000).
Somefirmsmaydecidetodoboth;makingandbuyingtheircriticalnonstandarditemsforkeepingit
safeintheinstanceoftroubleswiththesupplier.Suchapolicycanalsobefollowedwiththepurpose
ofinhouseperformanceevaluation(Burt,etal.,1996)andcompetencestimulation.
There are various advantages in outsourcing, such as cost reduction in general resulting from
economies ofscale, specialized investments and expertise (Anderson, et al., 1986) and possibility of
greater concentration on the "core competence" while avoiding "peripheral" operations. On the
negative sidethe control over the operations involved would be reduced; also, less flexibility would
exist to react upon unpredictable changes in requirements. Thus the strategy entails important
strategicandtheoperationalimplicationstoconsider(O'Connell,2005).
The problems with outsourcing depend on the type of outsourced items or services and their
importance;inmanycasesforexamplethepurchasedgoodslackhighqualityorgooddeliverywhere
as for fundamental services there would be a great potential threat entailing development of new
competitorsinthemarket.FollowingtheKraljicmodeltochooseoutsourcingsuitableitemcategories
inthesystem,theonesrecommendedarenoncriticalandleverageitems,bothlocatedontheleftside
ofthematrix,indicatinglowsupplyrisk.TheKraljicmodelwillbepresentedindetailedinthechapter
[5]
SinglesourcingMultiple
sourcing
Using multiple sourcing i.e. purchasing from several resources, is conventionally preferred to single
sourcing (O'Connell, 2005) or solesourcing (Cavinato, et al., 2000). And this is due to desirability of
havingreactionflexibility to strategicconsequences ofsource failure while having more negotiating
power in comparison with possible outcomes from single sourcing strategy such as economies of
scale,(Segal,1989)andespeciallyforasatisfactorysupplier,theirtacitrecommendationsandeasier
relationshipsandoperationsmanagement(Cavinato,etal.,2000).
Itisalsoimportanttodifferentiatesolosourcingandsinglesourcing.Solosourcingisbasicallydueto
scarcity of suppliers i.e. there is only one supplier, such as monopolist, whereas single sourcing is
havingonesupplierselectedamongahandfulofthem.Thecompanymayselecttheverynewsource
availableforasolosourcedsupplywhichiscalleddualsourcing.(Burt,etal.,1996)
In the real business world, it would take management authoritative belief in multiple sourcing
strategiestomakeuseofalternativeapprovedsupplierspermanently.Thisisduetoseveralreasons
which are in favour of sticking to current suppliers, such as possible inertia, pressure of work,
established relationships strength, or perceived switching costs (O'Connell, 2005). Using market
researchasthebasisforsourcingstrategydecisionmaking,multiplesourcingmaybeagoodoptionif
it was revealed that there is potential for supplier dependence, limited industry capacity, lack of
pricevolumediscounts,andlocationspecificneeds(Nicosia,etal.,2006).
In fact changing suppliers can be disruptive, time consuming, resource intensive, costly, and even
careerthreateningforpurchasingstaffincaseofmakingmistakes.Toimplementsuchchangesinthe
company, clear benefits have to be identified to overcome systemic inertia, accumulated personal
commitment,alternativeworkpriorities,andswitchingcosts(O'Connell,2005).Itisalsoimportantto
obtainadditionaldataaboutsupplierswithconflicts.Thisbasedonassumptionofpotentiallycritical
issuesareinvolved(Cavinato,etal.,2000).
Partnershipsourcing
Manyprofessionalsbelievethatmanagingsourcingrelationshipsaspartnerships,whetherupstream
or downstream, can lead to a considerable competitive advantage for the partners involved. While
partnership sourcing is mainly defined as a sourcing practice selectively based on a single supplier
providing the customer with extensive access to the operations and management systems of the
supplier over an extended prearranged period (O'Connell, 2005), it should not be limited to
relationshipsthatfocusonsinglesourcingorcostreduction(Cavinato,etal.,2000).
True alliances or partnerships require extensive collaboration meaning that seeking opportunities
through the other party should be aligned with cooperative focus on cost drivers (Cavinato, et al.,
2000). This, results in suppliers guaranteed demand for what they can offer to the customer
(O'Connell,2005)addedtoopportunitiestoreducecostandsteptowardcompetitiveadvantage.
Figure7belowdescribesthestepstowardimplementationofstrategicallianceandpartnershipwith
thesuppliers:
Figure7Strategicallianceandpartnershipsteps,(Cavinato,etal.,2000)
Further information regarding supplier relations and relationship management can be found in
subsequentchaptersofthisbook.

Purchasing portfolio models 39
[5] Purchasingportfoliomodels
There exist many different purchasing
portfolio and supplier base models. A
natural question to ask is then: which
ones do the companies really use? This
chapter will explain some of the most
well known purchasing portfolio models
that are presented in academic
literature and compare them to actual
company usage. It will be described in
the chapter that even though there
exists many different models to choose
from, the companies that we have
studied use their own or not use any
model at all. This is illustrated by two
real business cases.
Introduction
InthepreviouschapteronSourcingStrategiesitwasindicatedthatdifferentmodelscouldbeusedin
order tofindsuitable sourcing strategies.Purchasing portfolio models have received a great deal of
attentionduringthelastdecadesDubois&Pedersen,(2002),Olsen&Ellram,(1997),Bensaou,(1999),
and Gelderman & Van Weele, (2000). The most famous purchasing portfolio is probably the Kraljic
matrix which was first published in Harvard Business Review in the article Purchasing must become
supplychainmanagementin1983.Thematrixintroducedamodeltoclassifythecompanysproductsin
a two dimensional matrix: profit impact and supply risk (Kraljic, 1983). The model has been widely
discussed both in the academic and the business world (Bensaou, 1999), (Dubois, et al., 2002),
(Gelderman, et al., 2000) (Olsen, et al., 1997). Managing the firms supplier base is becoming an
essential strategic issue for the companies (Dubois & Pedersen, 2002). As an increasing part of
companies products are purchased from external companies the need for efficient and suitable
purchasing strategies becomes more important, as seen in the previous chapter. Since companies
purchasing activities greatly differ depending on which type of business they operate in, there is a
needfordifferentiatedpurchasingstrategies.
The idea of creating purchasing strategies only using a two dimension matrix has been widely
criticized Dubois & Pedersen, (2002), Hkansson & Persson, (2006), and Gelderman, (2000). To deal
withthelimitationsthatarerelatedtotheKraljicmatrix,boththeacademicandthebusinessworld
have made efforts in trying to develop and improve the strategies related to internal purchasing
strategies. Some authors suggest a network view on the purchasing activities rather than the
traditionalchannelapproach(Gadde,etal.,2001).Thesupplierssideoftherelationshipisdisregarded
in the traditional Kraljic matrix. Some authors such as Hkansson & Persson, (2006) have chosen to
focus the purchasing strategies towards the interdependencies between the companies. Other
authors such as Lilliecreutz & Ydreskog, (1999) have extended the portfolio approach to include
evaluationoftheactualsupplierrelationship(Lilliecreutz,etal.,1999).
This chapter will describeand analyze how the Kraljic matrix (Kraljic, 1983) has been developed and
adapted to fit companies in different business areas dealing with different products and different
suppliercharacteristics.Furtheron,thechapterpresentsempiricalfindingsonhowandatwhatextent
companiesareusingmodelsoriginatingintheKraljicmatrix(Kraljic,1983).Anempiricalstudyhasbeen
performedonthepurchasingactivitiesinVolvoLogisticsandSonyEricsson.Thetwocompanieshave
provided an insight into how companies use portfolio models in their daily operations. The findings
fromVolvoLogisticsprovideinsightonhowcompaniesuseportfoliomodelsonamorestrategiclevel
while the findings from the Sony Ericsson interview shows how theories from portfolio models are
usedinoperationalpurchasingactivities.
Thepurposeofthechapterwillbetodescribeandanalyzethedevelopmentsandadaptationsderiving
fromtheKraljicmatrix(Kraljic,1983).Furtheron,thepaperwilldiscussandanalyzehowcompanies
usethematrixintheirowncontextsituation.
This section will be followed by a theoretical background to a number of different portfolio models
that have been created. Further on, the chapter presents the empirical findings from the company
cases. Finally, an analysis is performed which discusses how companies use ideas originating in the
differentportfoliomodelsintheirpurchasingactivities.
TheoryandLiteratureReview
The following sections will provide a brief theoretical background to number of different portfolio
models.ThechapterwillbeginwithintroducingtheKraljicmatrix(Kraljic,1983).Thiswillbefollowed
byamodelcreatedbyHkansson&Persson,(2006)focusingonsupplierrelationships.Furtheron,the
chapterprovidesanintroductiontoamodelfocusingonmutualdependencecreatedbyGelderman,
(2000). This is followed by a model which ads evaluation of supplier cooperation, created by
LilliecreutzandYdreskog,(1999).Thiswillbefollowedbyamodeladaptingpurchasingstrategiesafter
supply situations by Van Stekelenborg and Kornelius, (1994). Further on, the chapter provides a
description of the article from Olson and Ellram, (1997), "A portfolio approach to supplier
relationships". The focus is set at the relationships between buyerssupplier. Finally, the chapter
describestheoriescreatedbyBensaou,(1999)concerningrelationshipscorrelationtoinvestments.
TheKraljicMatrix
PeterKraljicfirstmentionedhismodelinthearticlepurchasingmustbecomesupplymanagement
(Kraljic,1983).ThepurposeoftheKraljicmatrixisforcompaniestoanalyzetheirpurchasingportfolio.
The model is a four stage approach, and the stages are; classification, market analysis, strategic
positioning,andactionplans.Thosestageswillnowbedescribed.
Classification
Intheclassificationstagethecompanyhastoclassifyallitspurchaseditems.Thisisdonebylookingat
twodifferentdimensions;importanceofpurchasingandcomplexityofsupplymarket.Theimportance
of purchasing has criterias such as; percentage of raw material in total costs and value added by
productline.Theotherdimension,whichiscomplexityofsupplymarketthecompany,considersentry
barriers,logisticcostand/orcomplexity,andmonopolyoroligopoly(Kraljic,1983).
Thematrixisthendividedintofourdifferentcategories;materialsmanagement,supplymanagement,
PurchasingManagement,andsourcingmanagement(Kraljic,1983).
Materialsmanagement;isleverageitems,suchaselectricmotorsandheatingoil.Thedecisionmaking
fortheseitemsaredecentralizedandthereareofhighimportanceforpurchasing.Sincetheyareof
high importance the use of many suppliers is necessary to reduce the price of the item. The time
horizonforpurchasingtheseitemsisnormally12to24months(Kraljic,1983).
Supplymanagement;thisisstrategicitems,suchashighvaluecomponentsorchemicals.Thedecision
makingiscentralizedduetothefactthattheseitemsarebothofhighimportancewhenitcomesto
profitimpactandsupplyrisk.Thecompanyshouldaimforlongtermrelationshipswithsuppliersand
trytoestablishglobalsuppliers.Thetimehorizonfortheseitemsisverylongandcanbeupto10years
(Kraljic,1983).
Purchasing Management; these items are the noncritical items, such as office supply and coal. The
decision making is not centralized. The suppliers should be local with short term relationship. The
horizonsforpurchasingtheseitemsarenormallyunderoneyear(Kraljic,1983).
Sourcingmanagement;thisisthebottleneckitems,whichcouldbeelectronicpartsoroutsideservice.
Theyshouldbehandleddecentralizedbutwiththehelpofcentralizedcoordination.Itisimportantto
focus on cost management and shortterm sourcing. The time horizon is depending on availability
(Kraljic,1983).
Figure8Stageofpurchasingsophistication(Kraljic,1983)
Thenextstepforthecompanyistoweightthebargainingpowertowardstheirsuppliersagainstthe
companys own strength. When have reviewed for example the supply market and looked at the
availabilityofstrategicitems,thecompanythenhastoanalyzeitsownneedtobeabletogetthebest
supplyterms.Kraljic,(1983)usessomethingcalledpurchasingportfolioevaluationcriteriawhere10
supplierandcompanystrengthsarementioned.Inthislistcompaniescouldlookforsupplierstrengths
and see what they should look for in their own company. For example could supplier strength be
market sizeversus supplier capacity the company should then look at purchasing volume versus
capacity of main units. Of course these criterias has to be modified to different companies and
businesses(Kraljic,1983).
Strategicpositioning
The next step for the company is to positioning the materials and items in step 1 in the purchasing
portfoliomatrix.Thismatrixwillhelptoidentifyriskandopportunities.Thedimensionsinthismatrix
are company strength versus strengths of the supply market. The matrix has three different risk
categories; exploit, balanced, and diversify. For example if a company has a dominant role in the
marketandthesupplierstrengthislowtheriskwouldbecategoriesasexploit.Thismeansthatthe
companyhasanopportunitytobeaggressiveandtomakeagreatdealwiththesupplier.Ontheother
hand if thesuppliers strength is high and the company has a low dominance in the market the risk
wouldbecategorizedasdiversifywhichmakesthesuppliermorepowerfulandthecompanyshould
trytolookforothersuppliersormaterials(Kraljic,1983).
Figure9Purchasingportfoliomatrix,(Kraljic,1983)
Actionplans
Inthisstepthecompanyshouldtrytocomeupwithanactionplan.Thecompanyshouldalsolookata
purchasingstrategywhichincludevolume,price,inventorypolicyandsupplierselection.Thisshould
help to explore different sceneries with different suppliers and to be able to secure a longterm
relationshipwithasupplierortotakeadvantageofshorttermrelationships(Kraljic,1983).
Suppliersegmentations
Hkansson&Persson,(2006)wrotethearticle"SuppliersegmentationWhensupplierrelationship
matters"wheretheauthorsexplainsomeofthedrawbacksofdifferentpurchasingmodelsandalso
give an idea of how a new model could look. Their model is based on three different
interdependencies within and between organizations. According to Hkansson & Persson, (2006)
these interdependencies where identified by Thompsen (1967) and are called pooled, serial or
sequential,andreciprocalinterdependencies.Therewillnowfollowashortdescriptionofthesethree:
Pooled interdependence This relationship between two actors or activities means that they are
indirectly dependent. This is because they both are related to a third activity and/or are sharing the
sameresource.Pooledinterdependencecanleadtoeithereconomiesofscaleoreconomiesofscope.
This is according to Hkansson & Persson, (2006) because efficiency can be increased if an activity
sharestheuseofresourceswithotheractivities.Economiesofscalewillbereachediftheactivitiesare
thesameandeconomiesofscopeiftheyaresimilar.
Serialinterdependencethismeansthatthereareaserialofactivities.Sotheoutputofoneactivityis
going to be the input for the next activity. If a company manages this they could get economies of
integration.
Reciprocal interdependency this means that there is always an exchange of output and input
betweentwoactors.Iftheactorsmanagethistheycouldachieveeconomiesofinnovationandagility.
According to Hkansson & Persson, (2006) and Thompsen (1967) these different interdependencies
buildoneachother.Thesimplestoneispooledinterdependenceandthatonecanexistonitsownand
doesnt need the other two. Serial interdependence needs the pooled interdependence to function
andthelastone,reciprocalinterdependence,aredependentonboththeothers.
Hkansson&Persson,(2006)hasfromthesethreeinterdependenciesmanagedtoidentifythreebasic
supplierrelationshipsandwhatthedifferentmanagementshouldfocuson.TheseareshowedinTable
4below.
Typeofeconomy Interdependency Managementfocus Typeofrelationship
Standardisation,
Economiesofscale Pooled Mediating(connecting
similarityand
andscope interdependencies toothers)relationship
specialisation
Economiesof Serial Coordinationand Linked(streamlined)

integration interdependencies adaptation relationship
Economiesof Reciprocal Confrontationand Problemsolving

innovationandagility interdependencies learning relationship
Table4Threebasictypesofsupplierrelationships,(Hkansson,etal.,2006)
After havingdivided thedifferenttypesof relationship into three dimensions mediating, linked, and
problemsolving,Hkansson&Persson,(2006)meansthatanyrelationshipcouldbedevelopedintoa
mixofthesethreerelationships.Thereasonisthatcompaniesliketoachieveseveralofthedifferent
economies.Theyhavethereforemadeamatrixwheretheyhaveidentifiedsixdifferentcombinations
ofbuyersupplierrelationship.Theresultisshowninthetablebelow,alsowhichtypeofrelationship
thatshouldbeusedisshownintheTable5.
Typeof
3
relationship 1 2 Collaboration
Problem Typeofrelationship
Combinations Mediating Linked Categories
solving
ofcontent
1 High Low Low Distributionrelationship Functional
Supplyofrawmaterialsor collaboration
2 Medium High Low
standardcomponents Specialised
Focused
Performance
Advisor/consultancy measurement
3 Medium Low High
relationship Distinctroles
Leveraging
resourcesandskills
Logisticsserviceprovider
Systematic
3PLserviceprovider
4 High High Low collaboration
Supplyofcapacityor
Broad
standardcomponents
collaboration
Constructor
Performance
5 High Medium High ITsupport
measurement
Supportsystem
Leveraging
Systemsupplier
resourcesandskills
4PLserviceprovider
6 High High High Jointplanning
Supplyofstrategicsub
andproblemsolving
system
Table5Examplesofsupplierrelationshipsofthecombinationsidentified,(Hkansson,etal.,2006)
Thetableisdividedaccordingtocollaborationandthisiseitherfunctionalcollaborationorsystematic
collaboration.Bothofthesecollaborationshavethreesubgroups.Thefunctionalcollaborationdeals
only with relationships that use one type of interdependence, and the systematic collaboration
relationships that involve a combination of the interdependencies. There are some differences
between the two collaborations. The functional collaboration usually has very clear roles for the
differentactorsinvolveandthereisnormallyeasytofindmeasurementontheperformance.Thisis
nothowitworksinthesystemiccollaborationwheretherolesarenotthateasilyshownandwhere
thereisdifficulttomeasuretheperformance.(Hkansson,etal.,2006)
Amutualdependencebased
purchasingportfolio
Gelderman,(2000)statesinhisarticleTowardsaPurchasingPortfolioModel,BasedonMutualBuyer
SupplierDependence,2000thatitisnotclearwheretheroleofbalancedpowerisintroduced,and
wantstousepowerinthematrixtomakeitmoreclearinstrategicpurchasingdecisions.
Gelderman, (2000) starts discussing a matrix which uses diagonal axis. The first axis would be
concerning power, which would split the matrix into a buyer dominated area versus a supplier
dominated area. The next axis would be regarding importance of product. This is a combination of
highprofitimpactandsupplyrisk,whichwilldividethematrixintoimportantandnotimportant.What
Gelderman,(2000)hasdoneistorotatetheKraljicmatrix(Kraljic,1983)andusingaxesthatfocuson
powerandimportanceintothematrix.
Figure10TherotatedKraljicmatrix,(Gelderman,2000)
However, there are some drawbacks with this model. Gelderman, (2000) argues that the matrix
doesnt show balanced power between buyer and supplier, and that power could be balanced in a
relationship. Furthermore, he states that the concept of power is limited since it is determined by
supply risk and profit impact. Instead, Gelderman (2000) argues for a matrix based on mutual
dependenceintherelationshipbetweenabuyerandasupplier.
Thereareanumberofdifferentarticlesregardinglowandhighdependencewithrespecttobuyerand
seller dependence. For instance, a relationships classification regarding interdependence and
environmental uncertainty is mentioned in Gelderman (2000). They use three levels, high
interdependence, unbalanced exchange, and low interdependence. Where the first and third has a
mutualinterdependenceandthereforbalanced.Gelderman,(2000)drawstheconclusionthatthere
arefourcombinationsofdependence;highmutualdependenceandlowmutualdependence(which
are both balanced), buyer dominated which means high supplier dependence and low buyer
dependence,andsupplierdominationwithlowsupplierdependenceandhighbuyerdependence.
ThesefourdependenciescouldbeexpressedintermsoftheKraljicmatrix(Kraljic,1983),wherethe
strategicitemsandnoncriticalitemswouldbehighrespectivelowmutualdependencerelationship,
leverage items would be buyer dominated relationship, and bottleneck items supplier dominated
relationships.However,insteadofusingtheaxisthatKraljicusesinhismatrixGelderman(2000)uses
suppliersdependenceandbuyersdependencewhichwouldmakethematrixmoregeneric.
Suppliersdependence

Leverage Strategic

Noncritical Bottleneck
Buyersdependence
Table6Mutualdependencebasedpurchasingportfoliomodel,(Gelderman,2000)
Gelderman, (2000) doesnt recommend any generic purchasing strategies in his model. This is
something that Kraljic (Kraljic, 1983) does in his model and the recommendations is usually
summarized according to Gelderman, (2000) in four concepts; efficient processing, exploit power,
strategic partnership, and volume insurance. What is missing in these concepts is how a company
should do to be able to move from one position in the matrix to another. This is something that
Gelderman,(2000)thinksisveryimportantandeverypurchasingdepartmentshouldalwaystrytofind
abetterpositioninthematrix.
Addingevaluationofsupplier
cooperation
InthearticleSupplierclassificationasanenablerforadifferentiatedpurchasingstrategy(Lilliecreutz,et
al.,1999)theauthoremphasizestheimportanceoftreatingdifferentsupplierrelationsinorderforthe
productionsystemtobecomeleaner.TheauthorsbelievethattheKraljicmodelitselfisnotenough
forcapturingthedynamicsneededintodaysbuyersupplierrelationships.Asecondstepisproposed
involving three areas of focus: performance assessment, relationship characteristics, and network
position.Furtheron,theauthorsarguethenecessityofnotonlyclassifythepurchasedproductsbut
also evaluate the cooperation with the suppliers. The classification model is a twostep approach
(Lilliecreutz,etal.,1999).
Thefirst stepistodistinguishgroups ofproducts andtheir characteristics. The evaluation is divided

intotwomainvariables:EconomicprofileandComplexityandriskprofileofthepurchasedproducts.
Eachvariableisthedividedintosubvariableswhichshouldbeevaluatedandgivenavaluefrom15
depending on how closely they correspond to the product that is supposed to be classified. The
Economicprofilevariablehasfoursubvariables:productcostpershipment,totalcost,valueaddedon
endproduct,andimpactontotalcost.ThevariableComplexityandriskprofileisdividedintofivesub
groups: supply market, uniqueness of product, technical complexity of product, influence from
outside party, and other risk related to the product. The values of the main variables are then
calculatedasthemeanvalueofthesubvariables.Thepurchasedproductcanthenbeclassifiedinto
oneofthefollowingtypesofproducts:noncritical,leverage,bottleneck,andstrategic(Lilliecreutz,et
al.,1999).
Economicprofile
High Leverageproducts Strategicproducts
Low Noncriticalproducts Bottleneckproducts
Low High
Complexityandriskprofile
Figure11Productcharacteristics,desiredcooperation,(Lilliecreutz,etal.,1999)
The second step deals with evaluate the actual cooperation. This is done in three dimensions
including:Performanceassessment,RelationshipcharacteristicsandNetworkposition.Eachofthose
are divided into main and sub variables and given a value from 1 to 5. The variables in the first
dimension are: production and delivery, product delivery, experience, quality, timefocus, price and
cost, organization and personnel. The main variables in the second dimension are: financial and
economic issues, suppliers customer base, communication and information sharing, technological
possibilities, confidence and winwin focus, historical aspects, and strategic direction. The main
variables in the third dimension are: Size in the market, reputation, and influence on relationships
(Lilliecreutz,etal.,1999).
Performanceassessment Relationshipcharacteristics Networkposition

Productionanddelivery Strategicdirection Sizeinthemarket
Quality Financialandeconomicissues Reputation
Priceandcost Customerspositioninsupplierscustomerbase Influencebyotherrelationships
Organisation
Historicalaspects
Table7Cooperationcharacteristics,actualcooperation,(Lilliecreutz,etal.,1999)
Adaptingpurchasingstrategies
aftersupplysituations
In the purchasing model created by Van Stekelenborg & Kronelius, (1994) the authors suggest a
typology for characterization of supply situations. The method aims at supporting purchasers when
making decisions among the diversity of supply situations. The authors argues that the existing
literature in purchasing focuses on ideal types of relationship between buyer and supplier; the
powerbalance,theperceivedclosenessandcommitment,theintensityoftherelationship,thedegree
ofmutualadaptation,andthesolidityoftherelation.Theauthorsarguesthatthedescriptionofthe
buyersupplier relationship are not linked to specific situations and therefore cannot be used when
answeringthequestionwhentodowhati.e.inwhichpurchasingsituationstodowhat.Theauthors
suggestthatpurchasingnotonlyconstitutesoftheresourceside(thesuppliers),butalsospecifying
the right demand (production control) and therefore satisfying the internal market demand (in
termsofquality,quantity,timeandplaceofdelivery,andprice).Theauthorsdefinepurchasingtobe
a control function that aims at satisfying the internal market demand, by employing the proper
sources(i.e.thesuppliers)intheexternalsupplymarket.(VanStekelenborg,etal.,1994)
The need for Internal market demand (need of the organization) control and the need for external
supplymarketcontrolcanbecharacterizedashighorlow.Fromthis,amatrixiscreatedwhere
theneedforinternalmarketdemandcontrol(needoftheorganization)isontheverticalaxisandthe
need for external supply market control is placed on the horizontal axis. This leads to four types of
supply situations; plain supply, internally problematic supply, externally problematic supply and
complicated supply. To exemplify, in a situation where most control need arises from the internal
market demand, purchasing activities should focus on simplifying the situation with regard to the
internalmarketcharacteristics.
Figure12Typologyofsupplysituations,(VanStekelenborg,etal.,1994)
The need for external supply market control can be caused by different factors. If the customer is
importantforthesupplier,theneedforcontrolisless.Ahighnumberofpotentialsupplierssimplifies
the supply situation and therefore reduce the need for control. Poor supplier performance and
reliability,however,causesahigherneedforcontrolactivities.
Thefollowingsectionwilldescribethefactorsthatinfluencetheneedofinternalmarketcontrol.The
most important factor is related to the strategic importance of the purchased items. The price as
part of the total cost of the final product has a great influence. Product characteristics, such as
complexity of product, degree of uniqueness, and size all have strong influence on internal marked
demandcontrol.Theunpredictabilityofthecustomerdemand,themoreoftenthedemandchanges,
themoredifficultiesexistintheprocurement.Theabovementionedfactorsforcethebuyingcompany
tocontrolitsinternaldemandtosatisfythecustomersdemandatreasonablecostbyusinganexternal
supplymarket.(VanStekelenborg,etal.,1994)
Theportfoliotoolhelpstheorganizationtopositionitspurchasedgoodsinthefourquadrantsofthe
typology. Once a specific product is placed in one of the quadrants it is clear where purchasing
activitiesshouldbeaimedat.(VanStekelenborg,etal.,1994)
Theplainsupplysituation
In asituation whereboth the internal controlneed and the external control are low the purchasing
situation is called plain supply situation. In this situation the purchased goods are easy to specify
andprocureandcan thereforenotjustify complicatedand expensive purchasingactivities.The only
information flow needed is related to operational activities, concerning subjects such as rejects and
delivery dates. The most important metrics for this situation are price, service, and logistic
performance.
The purchase of resistors is mentioned as a good example for plain supply situation. They are
considered to be simple and standardized products, their added value is low, and so is their cost.
Furtheron,thedemandsituationismostoftenpredictableandnotlikelytofluctuateasmuch.(Van
Stekelenborg,etal.,1994)
InternallyproblematicSupplySituation
Inapurchasingsituationwheremostcontrolneedsarerelatedtotheinternaldemand,themostfocus
should be towards improvements and simplifications of the internal activities. The main goal of the
purchasingactivitiesshouldbefocusedontransferringinformationabouttheinternalmarketdemand
totherightplaceinthesupplymarket.Suitablesuppliersinthiscaseshouldbeabletocopewiththe
constantchanginglevelsindemand.(VanStekelenborg,etal.,1994)
Externallyproblematicsupplysituation
This situation occurs when the external control situation is high at the same time as the internal
control is low. In this situation, the organization should constantly work on finding suppliers and
ensuringsupplyofgoods.(VanStekelenborg,etal.,1994)
Thecomplicatedsupplysituation
Here both the internal market demand as well as the external supply market causes high need for
control. This situation often occurs for strategic goods related to very specific specifications. The
specificity allows no flexibility in the internal market demand and also limits the possibilities of
procuringthegoodsfromtheexternalsupplymarket.Purchasingactivitiesinthecomplicatedsupply
situationmustbeintegratedwithotherfunctionsinthebuyingcompanysuchasR&D,marketingand
production.(VanStekelenborg,etal.,1994)
Managingsuppliersegmentation
portfoliomodelsandrelationships
InthearticlefromOlsen,etal.,(1997)Aportfolioapproachtosupplierrelationships,thefocusissetat
the relationships between buyerssuppliers that should be interdependent and not only of a single
typenature.Muchoftheolderliteraturehastendtoforgottenthisimportanttypeofinterdependent
relationships, which also is one of the reasons behind why Kraljic matrix (Kraljic, 1983) has been so
criticized.
Further, Olsen & Ellram, (1997) focus at assisting management dealing with different supplier
relationshipsbytheuseofportfoliomodels.Theirapproachwillherebedescribedasitaddsvalueto
enhance theunderstandingof theextradimensions that needs tobe considered when dealing with
thesetypesofissues,namelysuppliersegmentationanditsrelationships.Finally,itshowsoncemore
howthelogicofKraljicmatrixhasbeendevelopedovertheyearsandhowitsbasiclogiccanbeused
althoughsomemodificationsareaddedtothematrix.
Step1:Analysesofthecompanyspurchases
In other words, Olsen, et al., (1997) have developed the Kraljic matrix (Kraljic, 1983) further in a
differentandmoreextensivemanner.Theyproposeathreestepapproachofanalyzingacompanys
supplier relationships. In the first step they have identified factors that influence the strategic
importance of purchasing and the difficulties of managing it. The factors influencing the strategic
importance are internal to the firm and the other factors connected to the difficulties of managing
purchasing are termed as external for the firm. The internal focuses should be on competence,
economic, and image, and the external factors focus on product characteristics, supply market
characteristics,andenvironmentalcharacteristics.
Thesefactorshastobeweighedbythedecisionsmakersatthecompanyi.e.becategorizedinorder
to fit in the purchasing portfolio model see Figure 13. Here, the weighed factors should have been
evaluatedandthenbeplacedinthemodel.Hereitisimportanttousetheentirescale,asthemodel
would otherwise not be very useful if everything were considered as being strategic (Olsen, et al.,
1997).
Each category in Figure 13 can be said having a type of idealization in terms of how the supplier
relationshipsshouldbemanagedmeaningthatnocomprehensiveguidecanbegiven.Inbrief,(Olsen,
etal.,1997)pointedoutthatnoncriticalitemiseasytohandleandofnonstrategicimportance,thus
standardization and consolidation should be focusing at. Leverage items are easy to handle yet
strategicimportantforthecompanyhenceatwowayrelationshipshouldbeestablishedfocusingon
costreductionbye.g.usingsystemcontracting.Forbottleneckpurchases,thecompanyshouldtryto
establishsomerelationshipsinvolvingthesupplier,e.g.concurrentengineeringorfindingsubstitutes
if possible. Lastly, the strategic purchases are both difficult to manage and of strategic importance
thus a close longterm relationship should be established including joint developments and deep
involvement of the supplier. When this has been done, the next step is to focusing on the actual
relationship(Olsen,etal.,1997).

Figure13Portfoliomodel,(Olsen,etal.,1997)
Step2:Analyzethecurrentsupplier
relationships
InKraljicsmatrix(Kraljic,1983),focusisplacedonthepowerbetweenactorsandhowthisshouldbe
exploitedifpossiblei.e.differentstrategiesshouldbeusedasaconsequenceofthepowerbalance.
Olsen,etal.(1997),considerthisapproachtobedangerousduetotherapidchangesintodaysmarket
conditions. Their point of departure is that power and risk are only two factors influencing the
strategywhenmanagingsupplierrelationships.
Therefore,theyintroducedasecondportfoliomodel,whichisbasedonthecurrentrelativesupplier
attractiveness and the actual strength of the relationship between buyers and suppliers. Supplier
attractiveness is described as the factors that make a company choose a specific supplier. These
factors that shall be used are categorized into five main areas; financial and economic factors,
performance factors, technological factors, organizational, cultural and strategic factors and other
factors. The same pattern is followed for the other axis, strength of supplier relationship, which is
describedbyOlsen,etal.(1997),asfactorsthatcreatesbondsbetweenbuyersandsuppliers.These
factors are categorized into economic factors, character of the exchange relationship, cooperation
betweenbuyerandsupplieranddistancebetweenbuyerandsupplier.
Consequently,thelastpartinstepno.2istoelaborateuponthetwodimensions,therelativesupplier
attractiveness and strength of supplier relationship and give a weight at each. Here the authors
suggest that also the voice of the supplier should be included e.g. not only have a single flow from
buyer to suppler but have a mutual or twoway communication to secure an effective allocation of
resources.Inthisrespect,Olsen,etal.sapproach,(1997),focusingmoreonthemutualdependencies
byincludingthesupplieratthisstagecomparedtoKraljicsmatrix(Kraljic,1983).
Figure14Analysisofsupplierrelations,(Olsen,etal.,1997)
Step3:Developactionplans
ThelaststepinOlsen&Ellrams,(1997)approachistodevelopactionplansbasedontheknowledge
gainfromstep1and2thatistheidealrelationshipandthentheactualrelationship.Aspointedoutby
the authors, no precise and comprehensive approach can be described for such action plans.
However,threegeneralgroupsofactionplanshavebeenidentified.Thefirstconcernscell1,2and4
andbasicallyfocusesonstrengtheningthesupplierrelationshipbyforinstanceincreasevolumesfor
the supplier or enhance communication. However, as for any of these cells in the second portfolio
model,itmustbeinlinewiththesetconditionsfromstep1i.e.howthecompanyshouldmanagetheir
relationships.Forcell3,5and6theaimmustbetomaintainthestrengthoftherelationshipe.g.by
reallocateresources.Cell7,8and9containssupplierthathavelowsupplierattractiveness.Herethe
logicreasoningwouldbetochangesupplierasalsohasbeensuggestedfromKraljicportfoliomodel
(Kraljic,1983).Olsen&Ellram,(1997)though,suggestanetworkperspective,meaningthatthefocal
company must look carefully into how a possible change might affect the companys network
position.Thus,thesupplierrelationshipperhapsshouldstrivedfortostrengthenitandincreasethe
attractiveness instead of changing supplier as it cost both time and money and also contains risks.
Finally, it should be emphasized that step 1 and step 2 must work and influence each other in a
comprehensive manner, meaning that by combine the views on the how the relationship should be
managedandhowtherelationshipcurrentlyismanagedanddependingonthoseinputscreatefuture
actionplansandallocatetherightresources(Olsen,etal.,1997).
Relationshipscorrelationto
investments
As has been pointed out, managing supplier relationship plays an important role when it comes to
purchasing activities. Olsen & Ellram, (1997) identified supplier attractiveness and the strength of
relationships as two basic variables for setting up appropriate action plan together with their
categorizationofpurchasingstrategies.However,thereareotherpointsofviewsamongtheauthors
inthefieldofpurchasinganditsvarietyinrelationships.
Bensaou, (1999) has taking a different point of departure in the analyses of buyersupplier
relationshipsinthecontextofpurchasing.Bensaou,(1999)studiedthecarindustrywiththeobjective
to investigate the performance of altered types of relationships. Accordingly, a correlation between
specificinvestmentsmadebyeitherpartnertotherelationshipandthepracticescommonlyrelatedto
strategicpartnershipssuchasmutualtrust,longtermrelationships,cooperationandsuchwasfound
Bensaou,(1999).
The investments made by either buyer or supplier could be of both tangible and intangible nature.
Tangiblebuyersinvestmentsareforinstancetooling,buildings,equipmentetc.thatarededicatedto
thesupplierandexamplesofintangibleinvestmentsarespenttimeandresourcesonlearning,sharing
knowledgeandinformationthatfosteringtherelationshipandthesamepatterncouldbefoundfor
suppliers making tangible and intangible investments. Consequently, the type of relationship as a
resultofinvestmentsmadecouldthenbeclassifiedinamatrixasseeninFigure15(Bensaou,1999).
Strategic
High Captive
Buyersspecific
partnership
investments Low Marketexchange Captivesupplier
Low High
Suppliersspecific
Figure15Buyerandsupplierspecificinvestment,(Olsen,etal.,1997)
Cell A, Market exchange, represent the category of which neither partner have made any specific
investments for working together meaning that nothing hindering any of them from switching to
another partner. Cell D on the other hand, Strategic partnership, represent a relationship that both
partieshavemadedistinctivemutuallyinvestmentsthustyingthemclosertoeachother.Thosetwo
types of relationships correspond according to Gadde & Hkansson (2001), to the core of low and
highinvolvementrelationships.CellBCaptivebuyerrepresentasituationwherethebuyerhasmade
specific investments while the supplier has not. Therefore, the buyer could be said being more
dependentonthesupplierthanviceversa.Finally,cellCcaptivesuppliercorrespondtotheopposite
i.e. the supplier has done more specific investments thus being more dependent on the customer
(Bensaou,1999).
An interesting issue to consider here is that according to Bensaous observations, no significant

performancedifferencesbetween the various relationships occurred. Even the strategic partnership
wasnotmoresuperiorinitsperformance,whichaddressthateachtypeofrelationshipcanbewellor
poorly managed. Therefore, Bensaou stresses first; that each firm must match the optimal type of
relationshiptothevariousproduct,marketandsupplierconditionsandsecondly;theymustadoptthe
appropriate management approach for each type of relationship. To conclude, a failure in this
respectiseitheramismatchintherelationshipdesignorthemanagementdesignapproach.(Bensaou,
1999)
Consequently, in order to answer questions such as how can managers determine when a captive
buyerdesignismoreappropriatethanastrategicpartnership,Bensaousuggesttwocontextualised
profiles.Thefirstprofilehelpsconcernedpeopletoidentifywhichtypeofrelationshipstouseunder
some specific conditions surrounding the products, services or market. The second profile aims at
designtheappropriatemanagementmodelsforeachtypeofrelationship.Toconclude,itissuggested
thatgoodpractisesaccordingtoBensaoumeansfirst,balancingaportfolioofrelationshipstailoredto
some given market and product conditions and secondly, managing each relationship in an
appropriatemanner.(Bensaou,1999)
Empiricalstudy
The following section will take its point of departure by describing two case examples from Volvo
LogisticsABandSonyEricssonrespectively.Asdescribedinthepurposethefocuswillbetoconnect
theory with practise thus increases the understanding of how and in which way companies actually
applytheoryintheirowncontextualizedsituations.
Casestudy:VolvoLogistic
VolvoLogisticCorporation(VLC)designs,handlesanddevelopscomprehensivebusiness
logisticssystemsmainlyfortheautomotiveindustryandisasubsidiarywithintheVolvo
Group. To clarify,thiscasewillfocuson logistics services that areboughtby VLCfrom
differenttransportationcompaniessuchasDHL,Schenker,andDSVamongothers.The
interviewwascarriedoutatVLCglobalpurchasingdepartmentinGothenburg,Sweden.
RonnyBrjesson,whowastrulyhelpfulbysharinghisinsights,wasinterviewedhencea
summarywillbepresentedforthereaderasitprovidesthebasisforthecominganalyse.
Historically,Volvo Logistics has notusedany outspoken model forpurchasingstrategy

development in addition to the standard purchasing processes and methods i.e. that
haveprovidedtheemployeeswithdirectivesandsuchissues.Thiscanbeexplainedby
thefactthatVLCpreviouslywasconsideredbeingarelativelysmallplayerthushadmore
controlandverbalcommunicatingthroughoutthecompany.However,asthecompany
continually has increased tremendous in size, a clear strategy that makes the
organizationworkinghomogenousneededtobeinplace.(Brjesson,2008)
Consequently,theirnewlydevelopedpurchasingmodelconsistsofthreesteps.Inbrief,
the first step aims at clarifying the current situation by looking at global spends. The
second step is about categorizingcommodities and formulating a desirable purchasing
strategy.Thethirdstepdealswithopportunityassessmentandisthelaststeptocarry
outbeforeaconcludedstrategycanbedetermined.(Brjesson,2008)
Firststep,globalspends
Asmention,thefirstpartinthepurchasingmodelaimsatclarifyingthecurrentsituation.
Here, it is important to thoroughly understand the prerequisites before moving to the
nextstep.Hence,obtainthefullpictureofwhatthespendsinfactare,wheretheyare
placedatandthecurrentmarketsituation.Forinstancehowlargevolumesarepresently
boughtandfromwhichsuppliers,whatarethetermsandconditionsforthesevolumes,
howisthebargainingpower,howdoesthecapacitybehaveinthemarketplace?Briefly
put, where does VLC place their money and what are the preconditions and saving
possibilities?Suchissuesmustbeclarifiedandunderstood,beforecontinuingtothenext
step,seeFigure16.(Brjesson,2008)

Figure16Spendanalyse(1)
Secondstep,commodityanalyses
Thesecondstepisaboutcategorizingcommoditiesintoa2x2matrixbyusingworkshops
andscorecardshenceformulatingadesirablepurchasingstrategy.Thevariablesusedin
thematrixareofinternalandexternalnatureandaretermedcriticalityandcomplexity
respectively.Thesetworepresentstheaxesthatareusedinthematrix,whichgivethe
matrix the structure showed in Figure 17. The logic used is close to the one in Kraljics
matrix.Standardcommoditiesforinstancearethosethatareneithercomplexnorcritical
tobuyforVLCsuchassimpletransportationroutesthatmosttransportationcompanies
easily can carry out. Bottleneck commodities on the other hand are services that are
difficulttocomeacrossinthemarketplacethuspriceandvolumesarenotassignificant.
The critically is therefore rather low but the complexity is usually high for these
commodities e.g. special transportations that few suppliers can deliver. Further, the
category leverage commodities are considered being important or critical for VLC, yet
notcomplex,meaningthatmanytransportationcompanieswouldbeabletodeliverthe
service. Therefore, prize becomes the most important factor to reflect upon in this
respect. Lastly, strategic commodities are the ones, which are considered being both
highly critical (internally) and complex (externally). Examples here could be logistic
services with routes stretching over several countries, which uses different
transportation modes (boat, train and road) and constitutes a big share of VLCs total
volume.Consequently,theaimistostriveforhavinglongtermrelationshipswiththese
suppliers.(Brjesson,2008)

Figure17Commodityanalyse(2)
As mentioned, scorecards are used for the categorization in step number two. The
commoditiesareweightedbasedonsomespecificfactorsreachingfrom110,thusthe
axis in the matrix spans from low to high. These factors that are being used here are
tailoredtotheirownparticularbusinessandcanbedeterminethroughworkshopsorbe
specified right from start. Moreover, during the interview it was concluded that such
factorswouldvaryfromtimetotimehencethereisnocomprehensivelistcoveringall
aspect. Instead, due to changing market conditions, such as the instability in todays
economy, the factors will vary thus being dynamic rather than static. However, some
factorsthatmoreorlessalwaysareconsideredasimportantinthisbusinesscontextare
prize, capacity, quality, delivery precision, volumes, flexibility and attitude of the
suppliers.(Brjesson,2008)
Thirdstep,opportunityassessment
The third step, termed opportunity assessment, is the last step to carry out before a
concludedstrategycanbedetermined.Here,atwotimestwomatrixispresentaswell.
The horizontal axis represents benefits and the vertical costs, both in respect to some
proposedopportunities.AsseeninFigure18,theaxesarestretchingfromlowtohigh.
Thismeansthatsomeweighingoffactorsbyusingworkshopsandscorecardsaredone
hereaswell.Accordingly,themostdesirableareatoreach,foragivenopportunity,in
this matrix must be where the costs are low and the possible benefits are high, which
wouldbeinthebottomrightcorner.(Brjesson,2008)

Figure18Opportunityassessment(3)
Furthermore, these opportunities derive from both the ideas and evaluations from
previous steps and on new ideas and experiences from people working within the
purchasingorganization.Obviously,itcouldbepeopleworkingoutsidethedepartment
aswelli.e.allvaluableopportunitiesshouldbeconsidered.However,theaimistotake
advantage of the skills and experiences of the people working with such issues.
Consequently,thisstepcouldbesaidbeingbasedonpastexperiencethusbeingaforum
for new innovative ideas, which might result in certain earnings for the company. As
mentioned, the evaluations of ideas are carried out in workshops and by using
scorecards. Consequently, some given opportunities are assessed and weighed thus
finallyplacedinthematrix.(Forenhancetheunderstandingofthisstep,anexampleis
providedlaterintheanalyse)
Finally, at this point a conclude strategy should be reached based on the inputs from
previoussteps,onetothree.Consequently,thefinalmodelcanbeoutlinedrepresenting
thedifferentstepsinaschematicorder,Figure19.

Figure19Stepsinschematicorder
Casestudy:ProcurementofplasticpartsatSonyEricsson
This section will describe how SonyEricsson purchases their plastic parts for mobile
phones.ThetextderivesfromaninterviewwithFredrikOhlin,commodityteamleader
forplasticparts,atSonyEricsson.Thefollowingsectionwillgiveabriefintroductionto
the company and their operations this will be followed by a description of the
purchasingprocessofplasticparts.
SonyEricsson Multimedia Communications is a global provider of mobile multimedia
devices, including mobile phones, accessories, and PC cards. The company was
establishedin2001bythetelecommunicationproviderEricssonandconsumerelectronic
provider Sony. SonyEricsson undertakes product research, design and development,
manufacturing, marketing, sales, distribution and customer services. The Global
managementofficeisbasedinLondon,andR&DisinSweden,UK,France,Netherlands,
India,Japan,ChinaandtheUS.(SonyEricsson,2008)
Sony Ericsson has a purchasing organization divided into two parts where one part is
strategicandtheotheroneisprojectbased.Theprojectbasedorganizationpartisco
located with the development units and intends to meet and serve the needs of the
developmentunits.Thefirststagesoftheproductdevelopmentareperformedinhouse
without any cooperation within the suppliers. However, once the product reaches the
finalstagesofthedevelopmentjointdevelopmentprojectsareinitialized.(Ohlin,2008)
Ineveryproject,thereisoneorseveralpersonresponsibleforacertaincommoditytype.
The number of commodity located to each purchaser is based on the strategic
importance and the constraints related to the product. If a purchased product is
consideredtobeofamoresimplenature,apurchasercanberesponsibleforsupporting
severalprojectswiththatcommodity.(Ohlin,2008)
TheplasticpurchasingsectionatSonyEricssondoesnothaveanygeneralapproachor
model for setting up supply strategies. The persons responsible for each commodity
groupcreatetheirownsupplystrategiesbasedonthespecificsituation.Thedepartment
inquestiondoesnotuseanystandardizedportfoliomodelwhichcanbeappliedforall
product categories. Further on, there is no specified strategy of model for analyzing
supplymarketswhensearchingfornewsuppliers.(Ohlin,2008)
InmostcasesthetraditionalpurchasingprocedureisnotappliedatSonyEricsson.Ina
traditional purchasing procedure, the purchasing process begins with the company
determining product specifications which is followed by a supplier selection and a
contracting. However, in Sony Ericssons case, an unspecified proposal is sent out
withoutanyproductspecifications.Sony Ericssonusesitsmarketpositiontodelaythe
finalspecificationoftheproductuntillateintheprocess.ThisallowsSonyEricssonand
the supplier to have a longer development phase before specifying the final product.
Further on, by using its company strength this way, Sony Ericsson can postpone price
discussionsuntillateintheprocesswheretheyhaveamuchbetterbargainingsituation.
(Ohlin,2008)
Sony Ericsson use a rating model for existing suppliers abilities based on past
experiences. Suppliers are selected based on past experiences, knowledge, suitability,
and production capacity.There area number of abilities as beingespecially suitable as
supplier characteristics; ability to produce various technologies inhouse, amount of
supportfromsupplierduringdevelopmentproject,andprice.Qualityismentionedbeing
aparameterwhichisveryhardtomeasureandisoftenbasedonpastexperienceofthe
supplier.SonyEricssonisinitsturnevaluatedbythesuppliersonayearlybasis.Factors
thatareevaluatedaremostlyfromaperformancepointofviewratherthanevaluation
ofsoftvalues.(Ohlin,2008)
Analysis
Thissectionwillcovertheanalysisofthetheorythathasbeenpresentedandtheempiricalstudies.It
will focus on similarities and differences between theory and empirical study. Further on, will this
chapter help the reader to get an understanding how purchasing works at Sony Ericsson and Volvo
Logistic, and the differences between their way of doing it to the way theory explains it.
Consequently,thefollowingsectioninthischapterwillcentreatenhancingtheunderstandingofhow
theoryandpractiseundercertainconditionsareconnectedandwhentheyarenot.
VolvoLogistic
As has been described, Volvo Logistics used a three step purchasing approach. Similar three step
approaches could be found in the literature as well. Olsen & Ellram, (1997) for instance use an
analogousapproachyetinaslightlydifferentsetup.Intheirportfoliomodelthefirststepistoanalyse
the companies actual purchases by give answers to certain factors such as economic value of
purchases,suppliermarketcharacteristics,productcharacteristics,competencefactorsetc,andthen
place the analysed commodities or purchases into their portfolio model. In this manner an ideal
strategyforthecommoditiesareprovided.
Similarly, the first step for Volvo Logistic, termed spend analyse, dealt with the clarification of the
actualor current situation hence provides inputs for their second step that is commodity analyse. In
this respect these two approaches (VLCs and Olsen & Ellram, (1997) are closely linked. Still, not
surprisingly Olsen & Ellram, (1997) propose a generic approach, meaning that the factors are not
tailored made for any specific business such as in VLCs case. Further, the actual spend is very
emphasized in practise but rather rarely mentioned in theory. This address that spends still is
recognisedforbeingoneofthesinglemostimportantfactorstoconsiderforcompanies.Besides,this
step (spend analyse) is considered being an extensive one in practise, meaning that the resources
allocated to carry out this part of the analyses are considerable This statement can be further
strengthenedbyCapGemini,whichaccordinglyrecognizethisstepasbeingextensiveinitsnaturei.e.
the amount of collection of data and the structuring of it is both time and resources demanding.
Therefore, this may imply why the clarification is seen as a separate step in practise and not in the
literatureandwhyitisnotdirectlyintegratedtogetherwiththeactualclassificationofcommodities
i.e.determiningacompanysidealpurchasingstrategies.
In general, theory does not emphasize the actual spend in the same extensive manner. Rather, it is
indirectlydescribed,meaningthatsomeuniversalareassuchaseconomicfactors,productcomplexity
etc.arefoundhencedoesnotprovideanyextensiveexplanationofhowcompaniesshoulddointheir
ownpracticalenvironments.Byextendingthatargument,companies(especiallytheonesthatareless
mature in this area) might therefore lack in successfully connecting useful theory to their own
businesssituation.
However,ashasbeenrevealedintheliterature,theauthorsinsistthatcompaniesmustcontextualise
theauthorssuggestionsi.e.thegenericfactorsthatinfluencingthecategorizationcannotbeseenas
comprehensive or tailored to any specific business. Bensaou, (1999) for instance suggests two
contextualisedprofilesthatshouldhelppractitionersapplyingtheoryintheirbusinesssituation.Still,
thesetwoprofilesaremorefocusingonsupplierrelationshipsandhowtomanagingiti.e.latersteps
inthepurchasingportfoliomodels.Thisaddressadifferentiationofwhereemphasizeareplacedat.
Having one practise oriented part delegating much focus into the current spend analyses i.e.
determiningwherethemoneyactuallyareplacedandanothertheoryorientedpartfocusingmoreon
latermorestrategicstepse.g.relationships,segmentationstrategyandtheactuallogicbehindit.
Thelogicreasonsforthismightsimplybeexplainedbythattherearenaturaldifferencesininterests
between the practitioners and the authors in the field thus working at different levels where one
could be said being more business oriented and another being more theoretically oriented.
Nevertheless,atsomelevel,wecanseehowcloselyrelatedtheoryandpractiseactuallyare.Asseenin
the first step, spend analyse, market situation should be clarified, current preconditions should be
evaluated.Questionssuchasvolumebought,bargainingpower,capacity,supplercharacteristicsand
more hasbeen addressed.Here,a strong correlation can be foundwith the literature. For example,
(Lilliecreutz, et al., 1999), Olsen & Ellram, (1997), and Kraljic, (1983) all suggest similar questions or
factorsthatshouldbeaskedattheclassificationsstage.Atthislevelofinteresttheoryandpractice
couldbesaidbeverysimilarthusbeconnectedtoeachother.
ThesecondstepofVolvoLogisticsnewlydevelopedpurchasingmodelhavegreatsimilaritiestosome
ofthemodelspresentedinliterature.Aswasmentionedintheempiricalpart,thesecondstepofthe
purchasing model aims at categorizing commodities into a 2x2 matrix by using workshops and
scorecardshenceformulatingdesirablepurchasingstrategies.
The vertical axis in Volvo Logistics matrix for commodity analysis classifies the external supplier
marketcomplexityintohighandlow.ThisaxisisverysimilartothehorizontalaxisintheKraljicmatrix
(Kraljic, 1983), which is called complexity of supply market. In the theory from Kraljic, the author
suggestthisaxistofocusonissuessuchascomplexityofsupplymarketthecompany,entrybarriers,
logistic cost and/or complexity, and monopoly or oligopoly, which can be considered to be quite
similartothefactorssuggestedbyVolvoLogistics.
Furtheron,thisaxishasresemblancetothehorizontalaxisonthematrixcreatedbyVanStekelenborg
& Kornelius, (1994) called control need of external supply market. In this model, the need for
externalsupplymarketcontrolcanbecausedbydifferentfactors.Ifthecustomerisimportantforthe
supplier, the need for control is less. A high number of potential suppliers simplifies the supply
situation and therefore reduce the need for control. Poor supplier performance and reliability,
however,causesahigherneedforcontrolactivities(VanStekelenborg&Kornelius,1994).
InthefirststepoftheportfoliomodelsuggestedbyLilliecreutz&Ydreskog,(1999)theauthorsalso
suggest a model to distinguish groups of products and their characteristics. The axis in this case is
calledcomplexityandriskprofileandisdividedintofivesubgroups:supplymarket,uniquenessof
product,technicalcomplexityofproduct,influencefromoutsideparty,andotherriskrelatedtothe
product. This can, as with the other models, be seen as a classification of the external risks and
complexityassociatedwiththesuppliers.
ThehorizontalaxisonthemodelcreatedbyVolvoLogisticsreferstotheinternalcriticalityofthe
producti.e.howimportanttheproductisfortheorganizationfromastrategicperspective.InKraljics
approachthisdimensioniscalledimportanceofpurchasingandhascriteriasuchas;percentageof
raw material in total costs and value added by product line (Kraljic, 1983). Further on, Van
Stekelenborg&Kornelius,(1994)callthisdimensioncontrolneedofinternalmarketdemand.Inthis
case, the most important factor is related to the strategic importance of the purchased items. The
price as part of the total cost of the final product has a great influence. Product characteristics,
such as complexity of product, degree of uniqueness, and size all have strong influence on internal
marked demandcontrol. The unpredictability of the customer demand, the moreoften the demand
changes, the more difficulties exist in the procurement. Lilliecreutz & Ydreskog, (1999) call this
dimension economic profile, this variable has four sub variables: product cost per shipment, total
cost,valueaddedonendproduct,andimpactontotalcost.
Ascanbeseenabovethemodelssuggestedintheoryhavegreatresemblancetothesecondstepof
VolvoLogisticsnewlydevelopedpurchasingmodel.Moreover,whenlookingatthedifferentproduct
groups the resemblance is even greater. Several authors, as well as Volvo Logistics, classify their
products into Leverage, Strategic, Noncritical, and Bottleneckitems ( (Kraljic, 1983), (Gelderman,
2000), (Lilliecreutz, et al., 1999), (Olsen, et al., 1997)). The difference though is that Volvo Logistics
have chosen to change Noncritical items into Standard items. Finally, as seen above the
differences are minor, meaning that both literature and practise suggest similar parameters to
consider,leadingtocomparablestrategies.
However, the dependency within the relationships, and to some authors even more important the
mutualinterdependency,isnotconsideredbeingequal.Ashasbeenelaborateduponpreviously,parts
of the criticism towards the Kraljic matrix derive from this diverse view of dependency and the
exploitationsoftherelationships.LinkingthistoVLC,theycouldbesaidusingsimilarlogicastheone
ofKraljic,meaningthatrelationshipwithmutualdependencyismainlyconsideredfortheupperright
corner in the matrix. Extending this by moving towards the network perspective, some authors
suggest that the relationship must be considered in a network context, meaning that the focal
companiesactionmightbereflectedoutinthewebandinworstcasealsoinfluencethecompanys
positionoroptionsnegatively.Thisaspectmightappeartobeforgottenbylookingatthesecondstep
inVLCspurchasingmethod,butitcouldalsobeamatterofprioritizingofwhatVLCaddressasbeing
moreimportantandhowlongtheorganizationasawholehasreachedintheunderstandingtothese
multifacetedissues,whichrequiresacertainmaturityorexperiencewithinthefieldofpurchasing.
During the interview some preset factors, that more or less always where considered during the
evaluation phase in step two for VLC, was discussed. In other words VLC have listed some business
specific factors that always should be evaluated thus given a weight at e.g. prize, volumes, quality,
deliveryprecisionandmore.Thisaddressaprioritisationbetweentheveryfactorsinitiallyconsidered
inthebusinesspractise.Incontrast,theliteraturesuggestdifferentgenericfactorsthatlatershould
begivenweightat.Inrespecttothatcompaniesnotunusuallylackintimeandresources,thiscouldbe
the natural explanation of this. However, the drawback of this could be that factors that are not
predefined i.e. are set during the workshops trough discussions could easily be forgotten and thus
becometreacherous.InthatrespectVLCcouldbeneficiallyusethegenericlistsoffactorspresentedin
theliteratureinordertonotforgetoroverlookimportantdimensionsthatmightimpactpositively.
Inthethirdstepofthepurchasingmodel,theopportunityassessmentofe.g.atransportisevaluated.
The purpose of this third step is to make the model business specific by using experience. Many
portfoliomodelssuggestedinliteratureareverygenericwhileVLCintroducesthisthirdsteptomake
themodelsuittheirownbusiness.Usingasingleportfoliomodelforsettingupsupplystrategiesfor
all types of business, product categories, and supply situations can be considered to be difficult. By
adapting existing theoretical models from theory to own company usage the models become case
specificandmoresuitableforcreatingsuccessfulandaccuratestrategies.
Asdescribed,VLCusestheirknowledgeandexperienceandevaluateideasbasedonthatwithrespect
tocostsandpossiblebenefits.ComparedtoOlsen&Ellram,(1997)approachforinstance,inwhichthe
actionplansimplyisbasedontheinputsfromthetwoearliersteps,VLCadsoneextradimensioni.e.
experience. Moreover, the two approaches use different variables i.e. basing their decisions on
different values. Olsen & Ellram, (1997) mainly focuses on the supplier attractiveness as the major
decisionvariablei.e.ifthesupplierarerecognizedasbeingattractivetheaimmustbetostrengthen
therelationship.However,byevaluatingthesuppliersbasedoncostsandpossiblegainedbenefitsand
also experience, the supplier can turn out to become less attractive e.g. since the people know by
theirexperiencesthattheflexibility,cashflowetc.willbedecreased.Hencetheaimshouldnotbeto
addmoreresourcestothesupplierintermsofe.g.increasingthevolumes,enhancecommunication
andsuch.Consequently,thisaddresshowissuesputtedinaspecificcontextcanmaketheoutput(i.e.
the decisions that shall be taken), change due the practical environments. To increase the
understandingofwhathasbeenstatedanexampleisprovided.
Forinstance,foragiventransportationroutecarriedoutonroad,thespendanalyse(stepone)shows
that the actual spends are relatively high and the commodity analyse (step two) shows that the
commodityiscategorizedasbeingleverage(i.e.notcomplextocarryoutforthesuppliersbutcritical
forVLCduetohighvolumes).
Inthelaststep,basedonexperienceandknowledge,theopportunityassessmentismappedbasedon
a number of attributes. These attributes are then used in the evaluation of benefits and costs.
Consequently, the output from step one and two might suggest that the cost should be lowered,
which could be done by changing the transportation mode from road to sea freight, given that it is
possibleinreality.Accordingly,thismightlowerthecostthusmightappeartobebeneficial.
However,basedonpastexperiencethisshiftintransportationmodewillcertainlylowertheflexibility
and decrease the cash flow since capital is tied up. In fact, due to the knowledge and experiences
withintheorganisationtheopportunityshouldinthiscasebeabandonandinstead,resourcesshould
beallocatedtotheexistingsupplierwiththeaimofloweringthecostsinotherwayse.g.increasethe
volumes, integrate computer systems and more. Consequently, this extra dimension termed
experiencecanobviouslychangetheoutcomesinceitimplicitlyconsidersmoredimensions.
Finally,thissectionhasshowntheimportanceforcompaniestoadaptportfoliomodelssuggestedin
the theory to suit their supply situation. The example above shows that business is dynamic in its
nature and is surrounded by an infinite number of parameters, which should be considered when
performingtheevaluations.Toconclude,qualitativeinputsmeasuredfromexperienceandknowledge
ishardtoputintoportfoliomodelshencemakestheoryandpracticesomewhatdifficulttoconnectin
acomprehensivemanner.
SonyEricsson
ThissectionwillanalyzetheempiricalfindingsfromtheinterviewwithFredrikOhlin,commodityteam
leader at Sony Ericsson, to the theory which has been given in the beginning of the chapter. The
following section will analyze the differences and similarities between some well known portfolio
models and the purchasing strategies at Sony Ericsson. Ohlin, (2008) describes Sony Ericsons
purchasingprocedureasfollows:
TraditionalpurchasingprocedureisnotappliedatSonyEricsson.Traditionally
the company sends out specifications on requested products to a number of
suppliers in order to get a quotation. However, in Sony Ericssons case, an
unspecified proposal is sent out without any product specifications. Sony
Ericsson uses its market position to delay the final specification of the product
until late in the process. This allows Sony Ericsson and the supplier to have a
longer development phase before specifying the final product. Further on, by
using its company strength this way, Sony Ericsson can postpone price
discussions until late in the process where they have a much better bargaining
position.(Ohlin,2008)
ThiswayofworkingcanberelatedtothethirdstepintheKraljicportfoliomodel.InthisstepKraljic
arguesthatthecompanyshouldweighttheirstrengthtowardssupplymarketstrengthandposition
thecompanyinamatrix.Thisshouldhelpthecompanytofindopportunitiesandrisksandtoposition
theriskwiththesupplieraseitherexploit,balanced,ordiversify.InSonyEricssonscasetheyhavean
exploit opportunity towards thesupplier which means that they could have anaggressive approach
and make beneficial contracts with the supplier, which is exactly what they are doing. Gelderman,
(2000)alsodescribestheimportanceofpowerandthedependencebetweenbuyerandsupplier.In
SonyEricssonscasetheyhaveabuyerdominatedrelationshipsincetheyseemtousetheirpowerto
gain advantages. According to Gelderman, (2000) theories on buyer and supplier dependence this
suggests that the items that Sony Ericsson purchases for this department are leverage items which
couldbethecasewhenpurchasingplasticpartstomobilephones.
SonyEricssonsuseoftheircompanystrengthenablesthemtorestructurethetraditionalpurchasing
procedure into one which is more suitable for them. Van Weele, (2005) describes the traditional
purchasingprocesstolookasfollows(Figure20):
Determining Selecting
Contracting Ordering Expediting Evaluating
specification Supplier
Figure20Traditionalpurchasingprocess,(VanWeele,2005)
However,SonyEricssontakeadvantageoftheirmarketpositiontorestructurethepurchasingprocess
intoonethatismoresuitableforthecompany.
Ordering/
Unspecified Selecting Preliminary Determining
price Expediting Evaluating
proposal Supplier Ordering specification
discussion
Figure21SonyEricsson'spurchasingprocess,(Ohlin,2008)
By adapting the purchasing process as described in Figure 21 where the price discussion has been
relocated to appear later in the purchasing process, Sony Ericsson have a much better position to
negotiatesincethesupplierhasalreadybookedcapacityintheirproduction.Furtheron,thedelayof
the final specifications gives the development team more time to finalize the product. This is an
important factor since mobile phones have become a fashionrelated product. The customers
increased awareness and demand on design forces the mobile phone companies to postpone final
completions of products until the very end. This way customer demands on certain designs and
coloursarebetterknown(Ohlin,2008).
AccordingtoKraljic,(1983)itisimportanttouseastrategyforanalyzingthemarketwhensearching
for new suppliers. Ohlin, (2008) explains that Sony Ericsson does not have a specified strategy or
model for analyzing supply markets when searching for new suppliers. This could be related to
Gelderman, (2000) which states that a buyer should not have a generic purchasing strategy and
perhaps it is good to not have generic strategy for analyzing the market and instead look at each
individualcase.
This could also be related to that the fact that there are no ranking for characteristics for potential
suppliers. However, Sony Ericsson uses a rating model for existing suppliers abilities based on past
experiences. Olsen & Ellram, (1997) have as a second step in their portfolio model which includes a
supplier evaluation. They evaluate the supplier either by relative supplier attractiveness (which are
factorslikeeconomicfactors,performance,andtechnology)andthestrengthofrelationship(whichis
factorlikecooperation,exchangeanddistance).ThiscouldberelatedtothecharacteristicsthatOhlin
describes:
Theabilitiesthatareespeciallysuitableassuppliercharacteristicsare;abilityto
producevarioustechnologiesinhouse,amountofsupportfromsupplierduring
developmentproject,andprice.(Ohlin,2008).
Further on, Lilliecreutz & Ydreskog, (1999) emphasizes the importance not only to classify the
purchasedproductsbutalsoevaluatethecooperationwiththesuppliers.AsmentionedSonyEricsson
usesaratingmodelforexistingsuppliersabilitiesbasedonpastexperiences(Ohlin,2008).Lilliecreutz
&Ydreskog,(1999)suggestatwostepmodelofevaluatingsupplierrelationshipwherethefirststep
evaluates ideal supplier relationship and the second step evaluates the actual supplier relationship.
WhileSonyEricssonevaluatestheperformanceofthesuppliersnumerousauthorssuggestmodelsfor
evaluatingtherelationshipbetweentheactorsratherthanonesingleactorsperformance(Olsen,et
al.,1997),(Lilliecreutz,etal.,1999).Muchoftheolderliteratureonsupplierevaluationstendstoforget
this important type of interdependent relationships, which also is one of the reasons behind why
Kraljicmatrix(Kraljic,1983)hasbeensocriticized.However,Ohlin,(2008)emphasizestheimportance
ofthesupplierscontributionstotheproductdevelopmentprocesstobeanimportantperformance
andevaluationmeasurement.Thiscanbeseenasanindicatoronhowwellthesupplierperformsina
cooperative environment. However, the evaluation of the relationship is far from as extensive as
suggestedinliterature.
Ohlin, (2008) mention quality, which could be an important measurement, as being very hard to
measure and often based on past experience. Looking at the way Ohlin describes important
characteristicsforsupplierandthewayOlsen&Ellram,(1997)aredoingit,thereareverysimilar.Even
thoughOhlindoesnotuseasmanyasOlsen&Ellram,(1997)allofhischaracteristicsarepresentedin
theirportfoliomodel.
SonyEricssondoesnotfollowaportfoliomodelwhenselectingsuppliers,Ohlinsaysthat:
Suppliers are selected based on past experiences, knowledge, suitability,

production capacity, and ability to produce certain technologies inhouse.
(Ohlin,2008).
In companies pursuit of reduction in supplier base, suppliers are increasingly requested to supply
companieswithnumeroustypesofitems.AsOhlin,(2008)mentionabovethesuppliersproduction
capacityandknowledgeindifferentproductiontechnologiesareprovingtobeincreasinglyimportant.
LargecompanieslikeSonyEricssonneedsuppliersthatcandeliverhugequantitieswithshortnotice,
whichsetshighdemandsonthesuppliersandthereforereducesthesupplierbase.Thisreducesthe
needforusingaportfoliomodelwhenselectingsupplierssincethesupplierbaseisverylimited.
To conclude, the way that Sony Ericsson is working has a lot of similarities to different portfolio
models. This section has dealt with the similarities that came up during the interview with Fredrik
Ohlin. It has explainedfor example howparts of the portfolio models of Kraljic, (1983) and Olsen&
Ellram, (1997) could be related to the way that Sony Ericsson works when identifying the right
supplier.
Conclusion
Purchasing portfolio models have received a great deal of attention during the last decades Kraljic,
(1983), Hkansson& Persson, (2006),and Dubois & Pedersen, (2002). This chapter of thebook has
providedatheoreticalinsightintosomeofthesuggestedmodels.Thetheoreticalchaptershowsthat
theKraljicmodel(Kraljic,1983),whichcanbeconsideredtobethemotherofallpurchasingportfolios,
hasbeenwidelydevelopedtofitdifferentsupplysituations.Furtheron,thischapterhasprovidedan
empiricalstudywhichhasshownhowVolvoLogisticsandSonyEricssonadaptsandusesderivingfrom
differentportfoliomodelintheirpurchasingorganizations.
The analysis has shown that Sony Ericsson doesnt use any purchasing portfolio model in their
purchasing activities of plastic products. However, several of the theories behind the models are
adoptedin the purchasing activities such as exploitation of power. However, the empirical study on
VolvoLogistics,whichwasonamorestrategiclevel,clearlydemonstratedhowpurchasingportfolio
modelsareusedwhensettingupsupplystrategies.VolvoLogisticsusederivingfromseveralarticles
such as Olsen & Ellram, (1997), Bensaou, (1999) , and Lilliecreutz & Ydreskog, (1999) when creating
theirownthreestepportfoliomodel.
Corporate Social Responsibility in Purchasing Management 69
[6] CorporateSocialResponsibility
inPurchasingManagement
This chapter studies how the concept of
Corporate Social Responsibility (CSR) is
related to Purchasing Management and
how CSR affects a purchasers way of
working when sourcing products. The
chapter will discuss ethics in terms of
trends, strategies and frameworks and it
will also present why companies can
benefit of acting ethical, but also why
they often fail in doing that.
Furthermore, social responsibility, the
benefits and drivers of this, and how to
reach a supply chain complying with
CSR standards will be discussed.
Introduction
As describe in the coming chapter regarding supplier evaluation, it can be seen that it is easy to be
temptedtoonlyfocusonfindingsuppliersthatcanprovidehighqualitytoalowpriceandtoforget
other issues. But nowadays, as mentioned in the chapter Definition and trends within Purchasing
Management, it has become more and more common that companies also contribute to the
development towards a better society by including issues as a sustainable environment and equal
rights for all people into their operations. These companies consider their Corporate Social
Responsibilityasapartoftheircorebusinessstrategy.
CorporateSocialResponsibility(CSR)isessentiallyaconceptwherebycompaniesintegratesocialand
environmental concerns into their business operations on a voluntary basis (European Commission,
2001).TheEuropeanCommission(2001)claimsthatalthoughtheprimeresponsibilityofacompanyis
togenerateprofit,companiescouldatthesametimecontributetothesociety,throughintegrating
theconceptofCSRintotheircorebusinessstrategy.Carter(2000)agreesinthisandmeansthatthe
ideaofsocialresponsibilityisthatacompanydoesnotonlyhaveeconomicandlegalobligations,but
also certain responsibilities to society which extends beyond these obligations. If companies shall
survivetodayscompetitionatthemarketCarter(2000)claimsthattheymustbesociallyresponsible
bynotonlyabidingbylawsandeconomicallyproducinggoodsandservicesdemandedbysociety,but
alsobymeetingethicalresponsibilitieswhichthatareexpectedbysocietyyetnotexplicitlystatedby
law.
According to Scholtens (2008), CSR is mainly divided into three different areas: ethics, social
responsibilityandenvironmentalresponsibility.Thischapterwillpresentandanalyzehowtheseareas
arehandledwithinthepurchasingprocessincompaniesandthefocuswillprimarilybeonethicsand
socialresponsibility.AsstatedaboveclaimstheEuropeanCommission(2001)thatthemainfocusfor
mostcompaniesistomakemoremoneysotheycanincreasetheirprofit.Thisstrategywillimprove
the companies economics but it can also result in that issues as ethics, the environment and the
societywillbeputaside.
ThischapterwillpresentwhatcompaniesshouldconsiderimportantfromaCSRpointofviewwhen
they are performing their supplier evaluations and their purchases. A discussion on why companies
tendtofocusonotherissues,e.g.priceandquality,insteadofethicsandenvironmentalissueswhen
choosingsuppliersandhowthiscanaffectacompanysnamewillalsobemade.Thediscussionwillbe
exemplifiedwiththehelpofactualcasestudies.
EthicsinPurchasing
Management
Ethicscanbedefinedasthebasicprinciplesofcorrectbehaviour,withreferencetoaspecificperson,
professionoractivity(Thomas,1984).Inthischaptertheperson,theprofessionandtheactivitywillbe
representedbythepurchaser,thepurchasingprofessionandthepurchasingfunction.
WhenmostpeoplethinkofethicsinPurchasingManagement,theythinkofbribesandgiftgivingfrom
supplierstopurchasers,butthereareseveralotherissuesthatneedtobeconsideredwhendiscussing
ethical issues connected to a companys sourcing strategy. When it comes to a companys ethical
responsibility regarding its purchases it is mainly the requirements on its suppliers and how the
companyacttoassurethatthesuppliersactethicalinitsoperationsthatcomesintofocus.
Requirementsthata companycould puton their suppliers involves demands on legal requirements,

childlabour,workersrightsregardingillegalwork,wagesandworkinghours,factoryconditionsand
safety, environment, but also requirements that the products not shall affect the users health
negatively (European Commission (2001) and EgelsZandn (2007)). Most companies aggregate all
these requirements into a framework called Code of Conduct, which will be presented and
discussedlaterinthischapter.
The chapter will start with explaining why ethics has become more important to consider within
PurchasingManagement,followedbythepresentationoftheconceptofCodeofConduct.Afterthis
will benefits and advantages that a company can achieve from an ethical behaviour be presented
followedbyanexplanationandacasestudyonwhycompaniesfailtomakeethicalpurchases.
AtrendtowardsEthicalPurchasing
The purchasing function has for many years been a forgotten function of business. It has been
disregardedandundervalued,whichhavebeenreflectedinforexamplelowstatusandlowsalaries.
Badenhorst(1994)meansthatthishasbeenacontributingfactortoanunethicalbehaviourwithina
companyspurchasingorganization.Thepurchaserswerenotsatisfiedwiththeirsituationandstarted
therefore to conduct unethical activities in their job assignments; the purchases. But over the last
years has the purchasing function become more important in companies and Quayle (2006) claims
thatthisisareasonforthetrendtowardsincreasingimportanceofethicsinPurchasingManagement.
Besidestheincreasingimportanceofthepurchasingfunction,therearealsoothertrendsandfactors
thathaveinfluencedtheethicalbehaviouratcompaniespurchasingdepartments.
Globalization and global sourcing are two trends that have affected the way companies work with
ethicalissueswhenpurchasingproductsandservices.Before,companiesdidmostoftheirpurchases
locallyandtheyweremostlyworkinginthesamebusinessculturesastheirsuppliers.Nowadays,asan
effectfromtheglobalizationandasmentionedinthechapteraboutsourcingstrategies,purchasers
workwithsuppliersspreadovertheentireworldsincetheywanttotakeadvantageoflowerlabour
costs in developing countries (Pretious, et al., 2006). This results in that different business cultures
meet,somethingthatWood(1995)meanscancauseconfusionforthepurchasers,e.g.somethingthat
isethicalrightatonemarketmightbeunethicalatothermarkets(Wood,1995).AccordingtoWood
(1995) this confusion can in the end result in an unethical behaviour and he means that bribery is a
goodexampleofanunethicalactivitythatoftenappearswhendifferentbusinessculturesmeet.Itis
thisconfusionthathasresultedinthatcompaniesnowputahigherfocusontheirpurchasingactivities
sotheycanavoidanunethicalbehaviour.
Wood(1995)claimsthatbriberyisthelargestethicalproblemwithinthepurchasingfunctionandhe
means that a major reason for this is that business people from the Western world, which have
successfullyindustrializedtheireconomies,assumethatnonorsemiindustrializedcountriesworkin
lower ethical standards than their own and that bribery is common in these cultures. Bribery, gift
givingandentertainmentareusedtomakethepurchasersfavourspecificsuppliersduringthesupplier
selectioninsteadofonlybaseitentirelyonprice,qualityanddelivery(Wood,1995).
Asmentionedabovebriberyisinsomepartsoftheworldregardedasillegalandalsounmoral,whileit
inotherpartsoftheworldisseenasapartofthebusinessculture.PretiousandLove(2006)mean
thatitwouldberudetonotacceptbribesinsomecountriessinceitisapartofhowbusinessismade
in these countries. The purchasers are often stuck between different business cultures and this will
affect how the ethical issues are handled. This since it is hard for a purchaser to decide when a
suppliers hospitality becomes excessive (Pretious, et al., 2006) and the purchaser will then start to
ponder if it is acceptable to accept the gifts and the invitations that the suppliers offer. This has
resultedintoalargerfocusonethicalissueswithinthecompaniespurchasingdepartmentssincethe
companieswanttheirpurchaserstobeabsolutelyclearonhowthepurchasesshallbemade.Theydo
notwanttoriskthattheircompanyshouldbeassociatedwithanunethicalbehaviourasbribery.The
chapterwilllateronexplainwhycompaniesfearthisnegativepublicity.
Another proof for that ethics becomes more important is that companies nowadays are developing
policiesandstrategiesthatareadaptedtothenewtrendsandthenewsituationthatthepurchasers
meet at the global market. The companies want both to create a business environment that
encourageethicalpurchasingbutalsocreateaframeworkthatthesuppliersmustfollowiftheyshall
beallowedtosupplygoodsandservicestothecompanies.ThisframeworkisoftencalledCodesof
Conduct.
CodesofConduct
Tobeabletomonitortheethicalissuesmentionedabovewhenpurchasinggoodsfromasupplier,the
purchasingcompanyisoftenusingaframeworkcalledCodesofConduct(EgelsZandn,2007).The
codes are used to ensure that the working condition at suppliers factories meet or exceed
international labour standards (Pretious, et al., 2006) and Badenhorst (1994) means that an ethical
CodeofConductisthemosteffectivetoolwhichcanbeusedagainstunethicalbehavioursinceitspell
outacompanysethicalpolicyaswellasguidelinesfordaytodayactivities.Evansetal.(2008)agree
in this and also claim that the Code of Conducts also can be used to extend a companys values to
suppliersandobtainsupportforitsCSRobjectives.
ExampleofcriteriathatareincludedincompaniesCodesofConductis:
U Workinghours
U Workingdaysperweek
U Guaranteedminimumwage
U Overtimecompensation
U Healthandsafetyeducation
U Physicalexaminations
U Childlabour
U Copyofemploymentscontract
U Accidentandpensioninsurance
(EgelsZandn,2007)
WhendevelopingaCodeofConductitisaccordingtoEvansetal(2008)importanttoensurethatit
reflects issues that are of importance for the company, e.g. human rights, the environment or
corruption. MarkPowderham, Europeanhead of procurement atKPMG LLP, agrees and also means
that the codes, if possible, shall be based on an established framework such as the United Nations
(UN) Global Compact (Evans, et al., 2008). This since it gives the codes influence and credibility.
Another example of framework that many wellknow companies uses when developing their own
codes are the Ethical Trading Initiative Code, which is based on international standards, UN
ConventiononHumanRightsandInternationalLabourOrganization(ILO)Standards.LizCrossworks
withCSRstrategyandpolicyforprocurementfortheBritishTelecomandshemeansthatcompanies
shall try to use wellknown frameworks that are intended to have a global application when
developingtheirCodesofConduct.Thiswillfacilitatetheimplementationofthem(Evans,etal.,2008).
Beforelaunchingthecodestothesuppliersthepurchasingcompanymustmakesurethatthecodes
are, as mentioned above, consistent with its own values and that they are relevant to the business
sectorthecompanyworkin.Thissinceitisthemarketsectorsandthelocationswherethecompany
and its suppliers work that will dictate the relative importance of the different issues in the codes
(Evans, etal.,2008).Before introducing the codes to the suppliers the companymust also bereally
surethattheyknowwhythecodesareimportantforthemselves.Evansetal.(2008)meanthatthisis
a prerequisite if the suppliers shall adopt the codes to their operations in a serious way. Further,
Badenhorst(1994)claimsthataCodeofConductmustalsospelloutthepunitivemeasuresifthecode
wouldbebreachedbythesuppliers.Thisshouldnotbedonewiththeintentiontofrightensuppliers
buttostatethatthecompanyconsidersanethicalbehaviourasveryimportant.
Itisnotonlythebuyingcompanythatcarriestheresponsibilityforthecodes;theresponsibilityshall
instead be shared between the buying company and the suppliers. But in the end is it the buying
companythatcarriesthehighestrisk,sinceitistheirnamethatisaffectednegativelyiftheirproducts
arenotproducedinanethicalway(Pretious,etal.,2006).Thatiswhyitisimportanttomonitorthat
the suppliers follow the codes, something that is very hard to do. But companies struggles hard to
ensurethattheirpurchasesaremadeinanethicalway,sincetheyknowwhatbenefitsandadvantages
theycanachievebydoingthat.
BenefitswithanEthicalBehaviour
Carter(2000)meansthatanethicalbehaviourcan,besidesthesupporttothesociety,haveapositive
effect on a companys image and reputation. For example, Ben and Jerrys contributions to society
have helped the company to increase its annual sales more than they expected (Carter, 2000). This
showsthatanethicalbehaviourcanaffectacompanysresultsinapositivewayandnotonlybean
extra cost as many people believe. Another argument for why a company shall encourage ethical
activities is that there are large costs associated with unethical activities, e.g. fines, liability and
negative publicity (Carter, 2000). An ethical behaviour will in this way also reduce these avoidable
costs.
Companieshaverealizedthatanethicalbehaviourcanhaveapositiveeffectontheirimagesandthey
havethereforeputalargerfocusonthisissue(Carter,2000).Companiesdonotwanttobeassociated
withunethicalactivitiesandtheythereforedisaffiliatefromsuppliersthatdonotfollowtheCodesof
Conduct.Thiscanbeseenfrequentlyinthemedia,forexampleinDagensIndustri(2008):
H&MaccusedforusingasupplierinBangladeshwithunethicalactivities
The same day H&Ms management said that they consider quitting their collaboration with this
supplier (Dagens Industri, 2008). This shows that companies act fast if their names and brands are
associatedwithunethicalactivitiesinthemedia,sincetheyareawareoftheimpactstheycancause.
Aconclusionfromthisisthatunethicalactivitieswillnotonlyaffectthesocietyinanegativeway,they
will also affect a companys business and economics by losing customers and increase costs and
therebyreduceprofits.Thesearestrongargumentsforwhycompaniesshallconsiderethicsimportant
whenmakingtheirpurchases.Anethicalbehaviourwillresultinthatacompanywillbeapartofthe
processtowardsabettersocietyandatthesametimeincreasetheirprofits.Thatiswhyitisimportant
tomonitorthatthesuppliersfollowtheCodesofConduct,somethingthatisveryhardtodo.Evenif
thebuyingcompanybelievesthatasupplierfollowsthecodes,therealitymayprovetobedifferent.
Whycompaniesfailinmaking
EthicalPurchases
Bayles(1983)meansthatethicsinPurchasingManagementarelargelydeterminedbythestructureof
the work situation and he claims that if ethical behaviour is encouraged, it is likely to occur. Bayles
(1983) further means that the major need for ethical conduct in Purchasing Management is a clear
organizationalpolicy.Thispolicywillprovidethepurchaserafirmbasisforethicalconduct.ButWood
(1995) claims that subordinates will do what their superiors do rather than what they shall do
according to the policy. Wood (1995) means that if the business environment within which the
purchasers work is focusing more on performance than an ethical behaviour then that is also what
thepurchaserswillfocustheirworktowards.
EgelsZandn (2007) has conducted a study that shows that some purchasing managers seemed
occasionallyto disregarddemandsfor greater compliance with Codes ofConduct in favour ofother
criteria.TheCodesofConductseemedattimestobetreatedasanoneconomicpurchasingcriterion
that could be traded for other noneconomic criteria, as delivery time and quality, or economic
purchasingcriteria,forexampleprice.Byfocusingontheseissuesinsteadofanethicalbehaviour,the
companywillfailinmakingethicalpurchaseandthiswill,asmentionedabove,harmthecompany.
Purchasing managers in particular can according to Carter (2000) significantly affect a companys
reputation. This since the purchasing function controls over 60% of a companys costs in some
industriesandthatthiscancreateatemptationbythepurchasingmanagerstoputbusinessinfrontof
ethics and thereby consider low costs more important than ethics when choosing suppliers (Carter,
2000). From the start, it seems that this approach is the right one to use to cut costs, but it is not.
Sincethepurchasersaretheonesthatcontrolsthemajorpartofthecompaniescostsitisalsothey
whofacethelargesttemptationtoperformunethicalactivities.
Carter(2000)agreesinthisandheclaimsthatpurchasersaretheonesthatareunderhighestpressure
todepartfromacceptednormsofbehaviourandethicssetbythecompany.Thismainlysincethey,as
stated above, controls large parts of the companies costs but also since purchasing is a boundary
spanning function that interacts with other members of the supply chain. The purchasers will
inevitably have to face situations where they need to make decisions on what is right and what is
wrong(Wood,1995).Thereisahighriskthatthepurchasersareinfluencedbypeopleoutsidetheown
company,e.g.suppliers,withforexamplesbribes.Theseareinfluencesthatcanresultinthatethics
are put asideinfrontof other issues (Carter, 2000). Asmentioned before, Wood (1995) means that
companies that are working on international markets carry a higher risk to deviate from the
organizational policies or rules that are defining acceptable behaviour. This since the cultural
differenceswillbeaddedtothenormalpressures.
Another reason for that a company fails to make ethical purchases is that they believe that their
suppliers follow the Codes of Conduct, but in reality they do not. An explanation to this is that it is
hard to gather accurate information concerning working conditions during announced inspections
(EgelsZandn,2007)anditisevenhardertoassurethatthesubsuppliersareactingethical.Amajor
reasonforthisisthatcompaniesoftenarehandingovertheresponsibilityofmonitoringasuppliers
subcontractors to the supplier itself, since it is impossible for the buying company to monitor all its
suppliers. But this will decrease the reliability even more. So even if a company is monitoring their
suppliersasgoodaspossible,itisdifficulttoensurethatallsuppliersactethical.EgelsZandn(2007)
studyonhowSwedishtoyretailersmonitortheirChinesesupplierswillprovethis.Thiscasewillalso
endthechapteraboutethicsinPurchasingManagement.
CaseStudy:HowSwedishtoyretailersmisjudgedtheirChinesesuppliers
EgelsZandn(2007)hasconductedseveralinterviewswithmanagersintheSwedishtoy
industrytobeabletoanalyzehowSwedishretailersareworkingwithCorporateSocial
ResponsibilityissuesandethicswhenpurchasingproductsfromtheirsuppliersinChina.
The study shows that all interviewed toy retailers in Sweden have adopted Codes of
Conduct for their suppliers operations to control that the production of the toys are
doneinaethicalway.TheSwedishretailershavemonitoredtheproductioninChinafora
longtimeandtheyclaimedthatthesuppliersoperationsarecarriedoutinthecorrect
wayregardingtheCodesofConduct,buttheywerewrong.
Although that the retailers have worked with the suppliers for a long time to ensure
compliancewiththecodes,mostofthesuppliersdonotcomplywiththecodes.Egels
Zandn(2007)studiedninedifferentsuppliersoftoystoSwedishretailersandnoneof
these complied with all the standards and requirements specified in the codes. The
Swedishretailersclaimedthattheymakeregularinspectionsofthesuppliersfactories
toconfirmthattheyfollowtheCodesofConductandtheymeantthattheyneverfind
anyproblems;itseemedthatthesuppliersoperationswerefollowingthecodes.
EgelsZandn(2007)meansthatoneexplanationtotheineffectivenessof,andsuppliers
lack of compliance with, retailers Codes of Conduct is that the retailers monitoring
organizations are unable to detect suppliers breaches of code standards. This would,
according to EgelsZandn (2007), create an illusion that the working conditions in
suppliersfactoriesareinaccordancewiththecodes.Sincetheretailerswouldnotfind
anyproblemsregardingtheCodesofConducttheywillnotdemandanychangesinthe
suppliersoperations.
Soeveniftheretailersareworkinginthecorrectwayregardingethicswhenpurchasing
products from China, the products are produced in an unethical way and according to
EgelsZandn (2007) this unawareness can result in that the retailers will receive
unpleasant surprises in the future. This proves that companies must be even more
critical to the suppliers operations when purchasing products so that they will be one
hundredpercentsurethattheproductioniscarriedoutinanethicalway.Themethod
that the companies use to monitor their suppliers needs to be updated since the
suppliersconstantlywillinventnewwaysonhowtheycanmisleadtheinspectors.
A buying company must always be ahead of its suppliers to be able to assure that the
suppliers are following the Codes of Conduct and that the products produced in the
suppliers factories are made in an ethical way. It is important that companies can
monitortheirsuppliersinaneffectivewaysothattheycanbesurethattheirpurchases
aremadeinanethicalway.Thiswillbenefitthesocietybutalsothecompanyitself.
SocialResponsibility
Socialresponsibilityimpliesthatcompaniesneedtotakeintoaccounttheimpactcompanydecisions
have on society. It reaches beyond the usual economical, legal and technical requirements of a
company.Asthepurchasingorganisationtoalargeextentdecideswhichsupplierstouse,theyhavea
great impact on the Corporate Social Responsibility performance of a company. Being the link
between the internal functions and external stakeholders, the people managing the purchasing
activitiesinacompanyhavelargeeffectonsociallyresponsibleactivities.(Carter,etal.,2004)
Carter et al. (2004) identified the main social responsibilities for the purchasing organisation to
include: diversity, human rights, safety and philanthropy. The following text will briefly touch upon
aspectsoftakingintoconsiderationthediversityandphilanthropyatthepurchasingdepartmentofan
organisation. Human rights and safety are connected to the codes of conduct and will therefore be
broughtupinthepartaboutethicalpurchasing.
This part of the book will first, explain the concepts of including diversity and philanthropy into the
purchasingorganization;second,followsadiscussionofthebenefitsanddriversofcomprisingsocial
responsibility into the purchasing part of the business; and third, how to reach a supply chain
complyingwithsocialresponsibility.
Diversity
When purchasing managers select a supplier it is often based on the fact that the supplier has the
productinstockandthatthepriceisacceptable,whetherthesupplierisamemberinaminoritygroup
is usually not a factor considered. However, according to Dollinger et al. (1991) both community
groups as well as the government have grown an increasing demand for companys support of
minority owned businesses. This has lead companies to focus more on strategies to purchase from
minorityandwomenownedbusinesses,strategiesknownasMinorityBusinessEnterprisePrograms
orhavingadiversityinthesupplierbase.(Dollinger,etal.,1991)Theseprogramsmayinfactworkasa
linktotheminoritycommunity.
In a study performed by Carter et al. (1999) it is demonstrated that there is more to sourcing from
minority suppliers than just the goodwill and satisfying the demand of the community and the
government. If the purchasing company can help minority businesses, these businesses will grow,
hiringmorepeopleandattheendcreatenewbuyersofendproducts.Infact,theminoritybusiness
communitymayworkasalinktothewholeminoritycommunity.Byincreasingthebusinesswiththose
suppliers it will help the companys growth in the community. It is also stated that the minority
suppliersbringvalueandinnovationtothepurchasingcompany.Sobymakinglongtermrelationships
withminoritybasedsuppliers,awinwinrelationshipcanbecreated.(Carter,etal.,1999)
Carteretal.(1999)continuebydefiningthekeysuccessfactorsincreatingsuchwinwinrelationships
withminoritybusinesssuppliers.TheseareTopManagementSupportandCommitmentofPurchasing
Personnel. The Top Management Support demonstrates their support by both set of resources for
programsforpurchasingfromminoritybusinessesandbypersonalpresenceatsupportactivitiesfor
purchasing from minority suppliers. Committed personnel are retrieved by good leadership, but this
can also be enhanced by creating a system rewarding purchasing personnel working with minority
ownedsuppliers.
Inbrief,theconceptofdiversityinthepurchasingsocialresponsibilityreferstohavingdiversityamong
suppliers, making sure minority and womenowned business are represented in the supplier base.
There is an increasing demand for this diversity, both from the community and the government. In
excessofsatisfyingthedemandfromthosestakeholders,thereisalsoaneconomicgaininfocusing
onusingminoritysuppliers.Andtosucceedinthisareathemostimportantfocusshouldbeputontop
management support and commitment of purchasing personnel. These two factors are key success
factorsalsowhenincorporatingphilanthropicvaluesintothepurchasingorganisation.
Philanthropy
Philanthropyistheinterestinhumanwelfareandadvancement,andthisisshowninformofcreating
work or institutions of learning to areas or persons in need of this, or by simply donating money
(Dictionary.com, 2008). In other words, philanthropy covers actions that are expected of them by
society,i.e.corporationsbeinggoodbusinesscitizens.Withthisdefinitiontheresemblancetoethical
purchasingseemsobvious;however,thereisadistinctdifferencebetweenthetwo.
Comparedtoethicalresponsibilities,philanthropyisnotexpectedinanethicalsense.Thesocietywill
notregardbusinessasunethicaljustbecausetheydontcontributetoprogramsencouraginghuman
andcommunitywelfare,althoughdesiringthemtodoso(Carroll,1991).Inthissensephilanthropyis
moreofavoluntarychoiceofthebusiness,creatinggoodwilliffulfilledandwiththegreatadvantage
that it doesnt create bad will if not fulfilled. There are also other benefits associated with
philanthropic actions than the fulfilment of the genuine interest in promoting human welfare and
goodwillofbeingagoodcorporatecitizen.
Simms(2008)bringsupthecompanyPackITthatofferjobstopeoplewithlearningdisabilities.This
companydisplayextraadvantageswithhavingaphilanthropicculture.Theemployeesatthecompany
have proved to be loyal to the company, and this commitment has enabled the company to have a
workforcewithgoodknowledgeandgreatmotivationtoprovidefirstclasscustomerservice.(Simms,
2008)
Thepurchasingdepartmentinacompanymaycomplywiththephilanthropicwaybysupportingand
purchasingfromcompaniesthatfocusonaphilanthropicbusiness,creatingtrainingandemployment
opportunities for groups of people in need of this. These suppliers are chosen for their support to
societyandnotonthebasisofhavingthelowestpriceandbestservice,althoughtheyverywellmay
havethis.
Inadditiontothespecificadvantagesmentionedfordiversityandphilanthropytherearealsogeneral
benefitsofcomprisingthesocialresponsibilityconceptintothepurchasingorganisation.
BenefitsandDriversofSocial
ResponsiblePurchasing
Forthecynicaltheinvestmentofresourcesputonsocialresponsibilitymayseemonlyasamarketing
trick, but there are other advantages aswell as drivers to gain when the companies focus on social
responsibility.Thistextwillprovidesomemorebenefitswithcomprisingsocialresponsibilityintothe
organizationthantheearliermentionedarguments.
Studies have shown that there are other benefits with comprising social responsibility into the
purchasingorganizationofacompanythanjusttheflirtingwiththemarket.Carter(2005)statethat
a high level of social responsibility at the purchasing department has a positive effect on the
organizational learning in the company, and this is motivated by the fact that companies with high
level of social responsibility have an organization encouraging free decision. Further, high
organizationallearningimprovestheperformanceofthesuppliers,andintheendreducescostsfor
thecompany(Carter,2005).
According to Pava (2008) the concept of social responsibility in businesses is, by contributing to
organizational improvement, an important resource in itself. According to Pava (2008) it promotes
transparency in the supply chain, encourage better communication, set high ideals in the corporate
culture, and result in exchange between companies that are useful for both sides. In addition to
creating advantages in the organisation the concept may also be useful in meeting stakeholder
demands.
Worthingtonetal.(2008)bringadditionalreasonsforincorporatingsocialresponsiblepurchasinginto
the company presenting drivers as: legislation/public policy and stakeholder expectations. The
government have inspired, even demanded, companies to invest and develop supplier diversity
programs, this to qualify and gain access to public purchasing agreements. As an example can be
mentioned the law created in US in 1978. Where so called prime contractors, including all public
contractsabove$500,000,wereforcedtouseandincludesmallerunderprivilegedcompaniesintothe
federalcontracts.Inexcessofthepressureputbythegovernmenttherearealsotheprivatesector
customers. There are proofs of companies that have started a supplier development program only
becausetheparentcompanystronglyencouragedthemto.(Worthington,etal.,2008)
The conclusion is that incorporating social responsibility into the purchasing department will bring
organizationaladvantagesbeyondfulfillingthedemandsofstakeholdersandbeingabettercorporate
citizen. These advantages will reduce the costs for the company. This together with the improved
marketprofileofcontributingtothewelfareofsocietywillbringhigherincome,intheendincreasing
therevenueof thecompany. With allpresented advantages the reader may be eager to implement
theideastothesupplychainoftheowncompanysbelonging.Doingthisitisimportanttoknowthe
mainconsiderationswhengettingthesupplychaintocomplywithCSRstandards.
Reachingasupplychaincomplying
withCSRstandards
After the above discussion of the advantages of including social responsibility into the purchasing
company, this text will address how to incorporate social responsibility into the organization, and
reachouttoandmakesurethestandardsareusedinthewholesupplychain.
Withtheincreasingglobalisation,usingsuppliersinanotherpartoftheworld,andgrowinginterestin
production environment there are three main steps for companies to address when managing the
suppliers.Thecompanymustcreatecodesofpracticeorcodesofconductandallmembersofsupply
chainmustgetinformationofthese.Thenamonitoringsystemmustbesetuptomakesuresuppliers
stick to agree upon standards. Last, a clear view of the effect of not complying with the standards
mustbemade.(Adams,etal.,1999)
As mentioned above, many companies introduce codes of practices that suppliers need to comply
withorfulfilinordertoqualifyasasupplier.ThisestablishmentofaCorporateSocialResponsibilityis
easy,comparedtorealizetheconsequencesofimplementingthenewpolicy(Arminas,2003).Endinga
contractwithasupplierthatdoesntmeetthestandards,e.g.byusingchildlabour,thissuppliermight
gooutofbusiness,withtheconsequencethatthechildrenmighthavetoliveonthestreetsinstead.
Whatshouldthecompanydointhiskindofsituation?
It might be better to try to manage the conditions in the suppliers factories, before withdrawing a
supplier contract. This management of working conditions at suppliers requires transparency in the
supply chain, sharing more information among the different parties in the supply chain (Arminas,
2003).Therearealsootheralternativesonhowtoinfluencesuppliersandpartnercompaniestofulfil
thesetupstandardsforsocialresponsibility.
In excess of creating codes of conducts Amaeshi (2008) bring up corporate culture and personnel
development as ways of exerting influence over the suppliers. By having an organizational culture
permeated by social responsibility the company can serve as a role model, allowing suppliers and
othercompaniesinthecompanynetworktomimictheirculture.Studieshaveshownthat:thehigher
thecompanysuccess,the greater the likelihood of other companiesto imitate. Individual issues are
hardertoaffectthroughcorporateculture,andinsteadpersonneltraininganddevelopmentmaybe
used by the company. Also including supplier personnel into such activities would enhance the
understandingandperformanceonsocialresponsibilitiesevenmore.(Amaeshi,2008)
Themostimportantfactorswhenincorporatingsocialresponsibilityintothepurchasingorganization
istopmanagementsupportandcommitmentofthepersonnel.Havingthis,thenextstepistomake
visible what the standards for social responsibilities are, usually by creating codes of conduct. But,
focusingonlyonsupplierstofulfilthecodesofconducts,endingcontractsifnotlivinguptopreset
standards,maycauselargesocietaldamage.Thecompanymustseetotheconsequencesbeyondjust
ending a contract with a supplier. Instead of ending the contract the company can influence the
suppliers by having an organizational culture permeated by social responsibility and committed
personnel.Trainingwithsupplierpersonnelcanincreasetheawarenessatsuppliersevenmore,atthe
endleadingtoasupplychainfullycomplyingwiththethoughtsofCorporateSocialResponsibility.
EnvironmentallySustainable
Purchasing
EnvironmentalresponsibilityisthethirdandlastpartoftheconceptCorporateSocialResponsibility.
Thegrowingawarenessoftheconsequencesforpollutingtheenvironmenthasleadtoalargerfocus
ongreenpurchasing.
Theincreasedconcernfortheenvironmentinthesocietyoftodayhasleadtoagreaterawarenessof
the consumers, and they keep track on companies making sure theyre performing in an
environmentally friendly manner. In addition no matter how good a company performs, if the
suppliers dont comply with the environmental standards the customer will soon hold the company
responsible.(Tyler,1997)
Purchasing environmentally is equal to procuring reusable and recyclable goods, taking part and
supportingthedevelopmentofenvironmentallyfriendlyitems,andtakeactionstoreducetheutilized
resources.(Carter,1996)
Sincethereisawholechapterinthisbookdedicatedtosustainableorgreenpurchasing,nodeeper
explanations or analysis will be done in this section. A more extensive presentation about green
purchasingwillinsteadbeofferedinthenextchapter;EnvironmentallyPreferablePurchasing.
Cancompaniesbecompetitive
whenactingaccordingtoCSR
standards?
Asexplainedearliertheincreasedawarenessanddemandfromconsumers,thegovernmentandother
stakeholders have contributed to comprise Corporate Social Responsibility into the purchasing
organization, implying e.g. using only ethically sound companies as suppliers. This trend is from a
socialviewobviouslyaverygoodthing,butobservingitfromaneconomicalaspect;isitevenpossible
forcompaniestosurviveusingonlyethicallysoundcompanies?Orcancompetingcompaniesdrawa
toolargeadvantageofusingsupplierswithunethicalstandards,andbecauseofthisbeabletooffera
lowerpriceorhigherqualitytocustomers?Arethebenefitsofanethicalbehaviourandshowingsocial
responsibilityenough,orwillthecostsofimplementingthisthinkingintothepurchasingorganization
outweightheadvantages?
Not everyone believes it is feasible to survive in the market of today using only ethically sound
companiesandspendingmoneyonphilanthropicissues.PeterSmith,consultantandformerpresident
ofCharteredInstituteofPurchasingsays:
If any organisation decides to work entirely to a CSR strategy and only work with ethically
soundcompanies,theywouldceasetoexistintwoyearstime.(Blackburn,2004)
Othershaveadifferentviewonthesubject.AccordingtoasurveycarriedoutonbehalfofMarks&
Spencer, almost 90 percentof the consumers think that companiesshould only use suppliers which
have good working standards in their factories. Some companies even make it a big part of their
marketing to have a strong focus on social responsibility. Companies as Gap, Giorgio Armani and
Conversearesomeofthecompaniesthathaveidentifiedthecustomersneedforanethicalalternative
andareusingthisstrategy.Andthereforeitisnotonlypossibleforcompaniestosurvivewhenusing
onlyethicallysoundcompaniesandshowinginterestinhumanwelfareandadvancement;itcaneven
provideaneconomicaladvantage.(Hurst,2006)
Using a future perspective, adding more arguments to the discussion may speak for incorporating
CorporateSocialResponsibilityevenmore.Asthedevelopingcountriescontinuetodevelop,thelaws
inthosecountriesmaychangeandadaptmoretowesternstandards.Thiswillmakeitimpossiblefor
suppliersinthosecountriestouseunethicalbehaviour.Theconsequenceofthis,ifnotabletoadapt
to new legislation, is that the factory need to be shut down. Then the companies using unethical
suppliersmayincurlargecostbecauseofneedtofindnewsuppliers,whilethebusinesseswithonly
ethicallysoundcompaniesintheirsupplychainwillthenavoidthesecosts.
Theincreasedinterestputinthemannerbybothconsumersandthegovernmentimplythatalthough
itiscostlytomakesuresupplierperformaccordinglytoCorporateSocialResponsibilitystandards,itis
still worth it. The risk of losing a substantial part of the company customers because not having a
supply chain complying with customer social responsibility, will probably lead to such a decrease in
sold products or services that the cost of implementing Corporate Social Responsibility into the
companywillbeconsideredlowincomparison.
CaseStudy:HowH&MintegratesCSRintotheirBusinessStrategy
H&MwasestablishedinVsters,Swedenin1947andisacompanythatsellsclothesand
cosmetics.H&Mhasabout1,700storesaroundtheworldandtheyemployabout68,000
people, but they do not own any factories. They instead buy their goods from around
800independentsuppliers,primarilyinAsiaandEurope.In2007wastheturnoverSEK
92,123millionandthecompanyisconstantlygrowing,establishingnewstoresallaround
theworld.SincetheystartedtofocusmoreonCSRin1997theirglobalCSRorganization
hasgrownconstantlyanditnowcomprises62persons(H&M,2008).
Innovest Strategic Value Advisors, a company specialized in analyzing companies

performanceonenvironmental,social,andstrategicgovernanceissuesrecentlyreleased
a new rankinglist that identified the 100 most sustainable companies in the world
regardingCorporateSocialResponsibility;oneofthosecompanieswasH&M(Innovest
Group,2008).ThisprovesthatH&Misagoodexampleofacompany,workingglobally,
thatintegratessocialandenvironmentalconcernsintotheirbusinessoperations.
H&MhasdevelopedastrategyforCSRwhenpurchasinggoodssincetheyclaimthatitis
important to not only focus on the profit the company makes but also to take its
responsibility as a large, global company and be a part of the development towards a
bettersociety.H&Mstateontheirhomepagethat:
H&Msbusinessconceptistoofferourcustomersfashionandqualityatthebestprice.
AtH&M,qualityisaboutmorethanmakingsurethatourproductsmeetorexceedour
customers'expectations.Italsomeansthattheyhavetobemanufacturedundergood
conditions and that our customers must be satisfied with us as a company. Taking
responsibility for how our operations affect people and the environment is also an
essentialprerequisiteforH&M'scontinuedprofitabilityandgrowth.(H&M,2008)
These kind of statements become more and more common at companies homepages
but what makes H&M to a top of the line company when it comes to CSR is that they
have developed a complete framework on how these issues shall be handled. H&M
presents their current status in their Corporate Social Responsibility Report for 2007
(H&M,2007).

Figure22H&MhasawelldesignedCSRstrategy(H&M,2008)
To beable toimprove working and environmental conditions in the supply chainH&M
hasdevelopedapolicyregardingCSRandlongtermgoalsthatarecommonforallthe
companys departments around the whole world. Ingrid Schullstrm, CSR Manager at
H&M, means that since H&M has worked on their CSR for a long time they have also
managed to implement the policies into their daily routines, especially in the field of
sourcing. For example, the computer systems that the purchasers at H&M use for
sourcingarebuiltsothatCSRpoliciescannotbeneglectedwhenmakingpurchases.
Rolf Eriksen, H&Ms CEO, means that the integration of CSR issues into the corporate
valuesanddaytodaybusinessactivitiesisacrucialelementofthesuccessoftheirCSR
strategy. He also claims that it is important that all employees within H&M apply the
same values in all operation throughout their global supply chain. H&M has therefore
developed aCSR strategy that involves both its own employeesbut also suppliers and
otherbusinesspartners.
WithintheCSRstrategyH&MhavedevelopedCodesofEthicsforthebusiness,Codeof
Conductfortheirsuppliersandalsoanauditprogrammetomonitortheirsuppliers.The
CodeofEthicshasexistedsince2003andthemainpurposeofitistoshowH&Msbelief
thatbusinessrelationsshouldbestrictlyprofessionalandthatthereshouldnotexistany
kindofgiftsorotheradvantagesforH&Memployeesoranybusinesspartners.
InordertomaketheirpositioncleartotheirsuppliersH&MhassetupaCodeofConduct
that is a nonnegotiable requirement from H&Ms side that all their suppliers and sub
suppliersmustfollow.H&MsCodeofConduct(H&M,2008)comprisefollowingissues.
CompliancewiththeCodeofConductisassessedbyH&MsFullAuditProgramme(FAP).
AthoroughFAPauditiscarriedoutwheneitherH&Mstartstoworkwithanewsupplier
orwhenanexistingsuppliertakesonanewsubcontractor.Thepurposeofthisprocess
is for H&M to get a good picture of the current conditions at the factories. The audit
includesmore than300itemsof clarification and it can take up to six working days to
complete. The suppliers are then rated depending on how well they fulfil the Code of
Conduct.In2007H&Mconducted1983CodeofConductcompliancevisits.
H&MsCodeofConduct:
1. LegalRequirements
a. Allsuppliersmustfollowthenationallawsinthe
countriestheyoperate.
2. ChildLabour
a. H&Mdoesnotacceptchildlabour.Theirpolicyisbased
ontheUNConventiononTheRightsoftheChild.
3. Safety
a. H&Mrequirefromtheirsuppliersthattheworkers
safetyshouldbeprioritizedandnohazardous
equipmentorunsafebuildingsareaccepted.Firstaid
equipmentmustbeavailable.
4. Workersrights
a. Nobondedworkers,prisonersorillegalworksare
allowedintheproduction.
b. Nopunishmentisallowed.
c. Nodiscriminationregardingrace,genderorreligionis
allowed.
d. Everyemployeeshallgetanemploymentcontract.
e. Minimumwagesandmaximumworkinghours.
5. Factoryconditions
6. Housingconditions
7. Environment
8. Monitoringandenforcement
a. H&Mexpectsallitssupplierstorespecttheabove
CodeofConductandtoactivelydotheirutmostto
achieveourstandards.

As the above table shows H&Ms Code of Conduct also includes environmental
requirementsforthesuppliersregardingchemicalhandlingandchemicalstorage,waste
water treatment and waste management. Besides the requirements on its suppliers
H&M is also including environmental issues into their buying process. They are for
examplelookingonanewwayfortheirorderplacementroutinestodecreasetheeffect
ontheenvironment,mainlytotrytodecreasetheclimatechangefromcarbondioxide
emissions.
Summing up, H&M has a welldeveloped strategy when it comes to CSR. H&M is a
company that takes it responsibility towards the society when making their purchases
andH&M'sCEORolfEriksenmeanthat:
We all need to share the responsibilities within our industry to create a level playing
field.Bothourindustryandsocietyhaveeverythingtogain.Thechallengeisofcourseto
makethathappen.Overall,weknowthatCSRisnotapassingtrend.Iamconvincedthat
CSR can minimise our risk and create longterm value, both for society and our
shareholders,andisimportantforourlongtermsuccess.
Environmentally Preferable Purchasing 87
[7] EnvironmentallyPreferable
Purchasing
This chapter will discuss the topic
Environmentally Preferable Purchasing
(EPP). A description of EPP and the
consequences of applying it, the trends
that lead to implementation of EPP and
a guide to finding and evaluating green
products and services are presented.
Finally, a case study, containing the
accomplishments achieved by
implementing EPP practices within an
organization, will be presented.
Introduction
As stated in the previous chapters, environmental responsibility is the third and last part of the
conceptofCorporateSocialResponsibility.InconformitywiththewholeconceptofCSR,thesubpart
about green purchasing has gained an increased attention during the last years. This can be seen
throughtherenewedsensitivitytowardstheenvironmentandsocialconsciousness.Withsustainable
developmentbeingpressedasthedominatingthemeintwentyfirstcenturycommerce,twotrends
arepredictedasinevitableinthenearfutureofgreenmarketing(Kaman,2008).
First,theconceptofanecofriendly/goinggreenapproachtodoingbusinesswillbepushedintothe
mainstream (Hanas, 2007). Second, corporations from developed countries will initiate international
green purchasing in order to expand their market, increase their sales and take advantage of the
positiveimageoftheirgreenbrandsestablishedintheirdomesticmarkets(Guru,etal.,2005);(Johri,
etal.,1998);(Pugh,etal.,2002).
ThepurposeofthischapteristoshowwhyEnvironmentallyPreferablePurchasingissomethingthat
shouldbeinthethoughtsofeveryorganization,howitwouldimpactthem,andwhatproductsand
whichattributeshavetobeconsideredwhenapplyingitinsomebusinessareas.
EnvironmentallyPreferable
Purchasing
Environmentally Preferable Purchasing (EPP), commonly called Green Purchasing, is defined as an

environmentallyconsciouspurchasingpracticethatreducessourcesofwasteandpromotesrecycling
and reclamation of purchased materials without adversely affecting performance requirements of
suchmaterials(Min,etal.,2001).Itisimportanttoconsiderthatitcoversboth,productsandservices,
andtheyhavetosuccessfullyminimizenegativeenvironmentalimpactsthroughouttheSupplyChain
untilthedisposalofsuchmaterials.
EPPcanbeusedeitherforinternalorexternalpurchasing.Theelementsaredifferentineachofthem
but the aim is the same when reflecting on acting in an environmental friendly manner. Meeting
internalcustomerrequirementsinagreen,costlyandtimeeffectivemannerisassignificantasinthe
relationships with external suppliers. This chapter will describe EPP when considering this kind of
relationships; a deeper review regarding internal purchasing will not be reflected throughout this
chapter.
Impactofimplementing
Purchasing
When applying EPP, a corporation can improve the working environment by using healthy and safe
alternatives for materials such as miscellaneous, raw materials, semifinished and finished products
amongothers.
The organization will be able to meet the environmental regulations and comply with the legal
responsibilities requested by the different institutions and the countries where they are located, as
wellasreachingtheirparticulargoals.Furthermore,itwillhelptoavoidalltheexpensesthathaveto
be reflected on when considering security issues within the company (i.e. healthy predicaments,
absenteeism, incurred costs, legal problems). All of this, recognizing that the availability of green
productsinthemarketisincreasingevenmoredaybyday.
AsMinandGalle(1997)stated,thehighcostofenvironmentalprogramsisthemostseriousobstacle
toeffectiveGreenPurchasing.Becauseofthis,EPPisoftenhamperedbythethoughtsthatpurchasing
environmentalfriendlyproductsordoingsoinanenvironmentallypreferableway,willincurinhigher
costsanditwilltransformthecompanyintoalesscompetitiveactorinthemarket.
Although this can be true, the company must be evaluated in terms of inclusive sustainability.
Sustainability is not only referred to economical wealthiest, but also to innovation, transformation,
ecological principles, globallocal partnering and collaborative research that embraces knowledge
flow(Motloch,etal.,2007).Allofthesefeatures,aswellasthetrendsthatleadtoimplementanEPP
that are explained further on in this chapter, must be considered in order to cope with the current
globalsituation.
Trendsthatleadtoimplementan
Purchasing
Emerging markets for green products, technologies and services mean promising chances for
internationalEPP.Inthesetimes,itiseasiertocarryoutanEPPduetotheconsciousnessencountered
in the young consumers and the consumers in general about the environmental aspects. This is a
situationthatcouldpushthecompaniestobeinterestedinapplyingEPPusingthemarketingofgreen
productsandservicesdirectedspecificallytothesectorsthatconsiderenvironmentalfeaturesasone
oftheirkeypointstoperformapurchasing.
Continuous environmental deterioration over the last few decades has drastically increased the
consumersawarenessofenvironmentalproblems(Min,etal.,2001).Themajority(70percent)ofUS
consumersaresympathetictoenvironmentalconcerns(Boeck,etal.,1997).
According to Min and Galle (2001), stronger consumer sentiment for environmental statutes has
pressuredagrowingnumberofcompaniestodevelopproactiveenvironmentalprograms.Someof
the principal trends that lead companies to apply an EPP strategy are (United States Environmental
ProtectionAgency,2008):
U Fearofliabilitylitigationandfines,andsubsequentnegativepublicity.
U Civilandcriminalpenaltiesagainstpollutants.
U Federalandstateenvironmentalregulations.
U Potentialliabilityandcostfordisposalofhazardousmaterials.
U Suppliersadvancesindevelopingenvironmentallyfriendlygoodsandproviding
environmentalfriendlypackages.
U Environmentalpartnershipwithsuppliers.
U Buyingfirmsenvironmentalpolicy.
These,andsomeotherfundamentalissuessuchastheconcernforsafetyandhealth,andtheglobal
warming,aretwomajorareasofevaluationontheenvironmentalinitiativesforGreenPurchasingand
Procurement (Elpida Memory, Inc., 2008). These topics will be considered briefly following the
explanationofwhythecorporationsarethinkingonbuyinggreennowadays.
Safetyandhealth
Whenreferringtosafetyandhealth,therearealotofinterestingandalreadyknowninformationthat
canbestated.Safetyandhealtharetwosignificanttopicsthateveryorganizationthatisthinkingon
applyingEPPhastohaveinmind(UnitedStatesDepartmentofHealth&HumanServices,2008).They
havetoappearalwaysinthevaluesofacompany,bepresentinthemindofeachemployeeatevery
time,andbepromotedinordertokeepituptodateandusethemnotassomethingthatpeopleare
forcedtodo,butasawayofliving.
EPP comprises safety and health as some of its main goals (United States Environmental Protection
Agency,2008).Thissituationstrengthensthecompanytoplacespecialeffortonproducingsafeand
healthy products as well. All kind of products must reach the quality standards and surpass the
legislationrequirementsinordertobesafethroughouttheSupplyChainandwhenbeingusedbythe
finalcostumer.Thismeansthatespeciallycompanieswhodealwithproductsthatwillbeingestedby
thecostumers(i.e.food)andwillbeindirectcontactwiththeuser(i.e.cosmetics,toys)mustbemade
with nontoxic materials and high quality standards in order to mind the health of the consumer.
Thosethatcontenttoxicmaterialssuchasdangerousgoodshavetobehandledwithspecialcarein
ordertoavoidsafetyproblemsforthepeoplethatareincontactwiththem.
SafetyandhealtharetwotopicsthatareconsideredasvitalwhenperformingEPP.Theyareperceived
tobeinstrumentalinthedevelopmentofapositivecorporateimageand,whenconsideringthemon
theexecutionofanEPPstrategy,thebusinesswillbeguidedtosuccess.AsForteandLamont(1998)
state,itappearsthatitisgoodbusinesspracticetobegreenasitsmainelements,safetyandhealth,
haveatendencytopromoteprofitability,improveemployeemotivationandcommitmentinaddition
tocustomerloyalty.
Globalwarming
AnothersituationthatmustbeconsideredwhenstudyingthesourcesofapplyinganEPPstrategyis
theglobalwarming,caused,amongothers,bythepollutionandgreenhouseeffect.
According to Tolba et al. (1998), various international treaties and agreements among different
organizationshavebeennegotiatedandsignedinordertocooperateinsupportingthereductionof
greenhousegasesemissionsothathopefullyfurtherglobalwarmingcanbesloweddown.
The issue of global warming has triggered dispute in several countries evaluating the benefits of
limitingcompaniestoapplyEPPinsomeoftheproductsthatareprocuredagainstthecoststhatsuch
limitationwouldentail.Organizationshavebeenanalyzingthecostsandbenefitsofusingalternative
environmentalproductsinordertoreducewastesandemissionofpollutantswhendisposingthem.
These solutions seem adequate and would be the best way to promote EPP among different
companies; furthermore, they will support the actual tendency of awareness about the global
environment.
FindingandevaluatingGreen
ProductsandServices
Thispartwillbepresentedasapracticalguideforthereaderinordertoillustratewhatproducts,and
which attributes must be considered when performing the procurement process within one of the
fieldsshown.
This guide could be a way to ensure and evaluate, in an interesting and accurate way, that an
organizationisconductingEPP;analyzingiftheircurrentraw,manufacturing,packaging,distribution,
use, reuse, operation, maintenance and disposal materials are present in one of the different
categoriesandtakeintoconsiderationtheseattributes.
In the first part, a record of the products that can be found within some different areas will be
presented.Secondly,acatalogueofthedifferentfeaturesthatshouldbeconsideredwithintheseand
otherproductsandservicesisshown.
GreenProductsandServices
In order to help the purchaser to know which are the products that can be found currently in the
marketwhenapplyinganEPPstrategy,acategoriesproductslistispresentedinthissection.
Someoftheproductsthatcanbecurrentlyfoundinthemarketareincludedinthefollowingtables
(UnitedStatesDepartmentofHealth&HumanServices,2008):
Constructionproducts NonpaperOfficeproducts
Buildinginsulationproducts Binders(paper,plasticcovered)
Carpetbacking Officerecyclingcontainers
Carpetcushion Officewastereceptacles
Cementandconcretecontainingcoalflyash Plasticbinders(solid)
Cement and concrete containing ground
Plasticclipportfolios
granulatedblastfurnaceslag
Consolidatedandreprocessedlatexpaint Plasticclipboards
Floortiles Plasticdesktopaccessories
FlowablefillPolyesterCarpet Plasticenvelopes
Laminatedpaperboard Plasticfilefolders
Patioblocks Plasticpresentationfolders
Railroadgradecrossings/surfaces Plastictrashbags
Showerandrestroomdividers/partitions Printerribbons
Structuralfibreboard Tonercartridges
Table8ProductsthatcomprehendEPP:ConstructionproductsandNonpaperOfficeproducts
Landscaping Packandrecreationproducts
Foodwastecompost Parkandrecreationalfurniture
Gardenandsoakerhoses Plasticfencing
Hydraulicmulch Playgroundequipment
Landscapingtimbersandposts(plasticlumber) Playgroundsurfaces
Lawnandgardenedging Runningtracks
Yardtrimmingscompost Paperandpaperproducts
Table9ProductsthatcomprehendEPP:Landscaping,andPackandrecreationproducts

Miscellaneousproducts Transportationproducts
Awardsandplaques Channelizes
Industrialdrums Delineators
Mats Flexibledelineators
Pallets Parkingstops
Signage Trafficbarricades
Sorbents Trafficcones
Strappingandstretchwrap
Table10ProductsthatcomprehendEPP:MiscellaneousproductsandTransportationproducts
Commercial/industrialsanitarytissueproducts Vehicularproducts
Miscellaneouspapers Enginecoolants
Newsprint Rerefinedlubricatingoils
Paperboardandpackagingproducts Retreadtires
Printingandwritingpapers
Table11ProductsthatcomprehendEPP:Commercial/industrialsanitarytissueproductsandVehicularproducts
ItisimportanttomentionthattheseproductsarepresentlysubjecttomandatoryEPPrequirements
bydifferentgovernmentalorganizationaroundtheworld,whichshouldputpressureoncorporations
toconsideranEPPpolicyfortheareasmentionedinthelist.
Environmentalattributestolook
for
Itisoftencommonforpurchasingdepartmentsorforindividualpurchaserstobeunsureaboutwhich
aretheprincipalattributestojudgewhenprocuringanitemoragroupofitemswithinacertainarea.
The following tables specify these attributes considering an EPP strategy (United States
EnvironmentalProtectionAgency,2008).Itprovidesaninterestingselectionofattributesstructured
andclassifiedaccordingtoacategorizationofdifferentproductsandservicesareas.
BuildingsandConstruction Cleaning
Biobasedcontent Minimizesexposuretoconcentrates
Energyefficient Noozonedepletingsubstances
Enhancedindoorenvironmentalquality Recyclablepackaging
Lowembodiedenergy Recycledcontentinpackaging
Recyclableorreusablecomponents Reducedbioconcentrationfactor
Recycledcontent Reducedflammability
Reducedornoaddeddyes,exceptwhen
Reducedenvironmentalimpactoverthelifecycle
addedforsafetypurposes
Reducedoreliminatedtoxicsubstances Reducedornoaddedfragrances
Reducedwaste Reducedornoskinirritants
Reduced or no volatile organic
Responsiblestormwatermanagement
compounds(VOCs)
Sustainabledevelopment,smartgrowth Reducedpackaging
Usesrenewableenergy
Waterefficient
Waterreuseandrecycling
Table12Environmentalattributes:BuildingsandConstruction,andCleaning
Meetingsandconferences Electronics
Accommodationswithefficienttransportationroutes Designedforrecycling
Accommodationswithenergyandwaterconservation
Energyefficient
programs
Environmentally sound takeback and
Accommodationswithmasstransitaccessiblelocation
recyclingoptions
Accommodations with recycling and waste
Extendedproductlife,upgradeable
minimizationprograms
Electronicdistributionofmaterials Recyclablepackaging
Minimize packing and shipping materials, disposable
Recycledcontent
products
Minimizetraveldistanceforattendees Reducedmaterialsuse
Onlineregistration Reducedornotoxicconstituents
Recyclehandoutsandbadges,signage,paperproducts Reducedpackaging
Reusablebadges,signage
Reusablefoodserviceware
Table13Environmentalattributes:Meetingsandconferences,andElectronics
Landscaping Fleets
Integratedpestmanagement Alternativelyfuelled
Lowimpactdevelopment Cleanerfuel
Recycledcontentmaterials Electric
Reducedornopesticideuse Fuelcell
Stormwatermanagement Fuelefficient
Useofnativeplants Hybridelectric
Wastereductionandrecycling,includingcomposting Lowemissions
Waterconservation Noorlowhazardousmaterials
Table14Environmentalattributes:LandscapingandFleets
Carpets Foodservices
Lowornovolatileorganiccompounds(VOCs) Biodegradable
Notoxicdyes Energyefficient
Recyclable Recyclable
Recycledcontent Recycledcontent
Reducedenergyuse(frommanufacturing) Reusable
Reducedorimprovedairemissions(frommanufacturing) Waterefficient
Table15Environmentalattributes:CarpetsandFoodServices
Officesupplies Paper
Nontoxic Postconsumerrecycledcontent
Recyclable Processedchlorinefree
Recycledcontent Recyclable
Remanufactured Soybasedinks
Reusable
Table16Environmentalattributes:OfficesuppliesandPaper
Theinformation contained in thesetables can be used as recommendations for procurement of the

popularenvironmentallypreferablelistedproducts.
Casestudy
The following case is a general study case showing the accomplishments achieved by implementing
environmentallypreferablepurchasingpractices.
ItconsidershowTheBodyShop,thesecondlargestcosmeticfranchiseintheworldandtheonethat
emphasizes the most its support for a wide range of issues around the world (The Body Shop
Internationalplc.,2008),performstheirprocurementprocesses.Thisstudycasewasextractedfrom
thecontributionsofAlistairJacksonemployeeofTheBodyShop,whosharedinformationontheir
companys environmental purchasing initiatives (United States Environmental Protection Agency,
1999).
Casestudy:TheBodyShopSocialandEnvironmentalconcerns,the
onlywaytodobusiness
Severalcompanies,includingTheBodyShoparepurchasinglighterweightorreduced
packaging to contain their products, which significantly reduces product packaging
volume,savesmoney,andreducesimpactsonsolidwastedisposalsystems.
As other manufacturers focus efforts on avoiding or reducing smaller sets of specific

chemicals,TheBodyShop,avoidstheuseofpolyvinylchloride(PVC),acommonplastic
resin,outofconcernforthedioxinsproducedaspartofthemanufacturingprocessand
forthepotentialadversehealtheffectsfromchemicalsroutinelyaddedtotheplasticto
improveperformance.
Aspartofitssocialandenvironmentalobjectives,TheBodyShopattemptstoavoidthe
use of animalderived ingredients and petroleumbased and synthetic chemicals
whenever possible. Every product, however, must meet stringent performance
requirements,whichsometimesrequirestheuseofchemicalsitwouldotherwiseavoid.
Forexample,TheBodyShopusessyntheticmuskandwhaleoilsbecauseitbelievesthe
syntheticalternativesaremoreenvironmentallypreferablethanthenaturalalternatives,
whichwouldinvolvedestroyingtheanimalsfromwhichtheoilswouldbecollected.
The Body Shop also compared the environmental impacts associated with
biodegradable and recyclable product packaging. While biodegradable packaging
soundedenvironmentallypreferable,thecompanydeterminedthatmostbiodegradable
productswillonlydegradeinveryspecificconditionsandthatthoseconditionsarenot
likely to occur in modern landfills. Other biodegradable products degrade into
potentially hazardous constituents. After examining the available biodegradable
packagingalternatives,thecompanydecidednottousebiodegradablepackagingbutto
continueprovidingitsproductsinrefillableandrecyclablecontainers.
The Body Shops Ethical Audit and Environmental Departments developed a ratings
systemtoevaluateexistingandpotentialsuppliers.Suppliersareevaluatedonanumber
of environmental and social justice criteria and rated on a scale from one to five stars.
VendorswithhigherratingsreceivealargerpercentageofTheBodyShopsbusiness.
Whiledoingallofthis,TheBodyShopalsostrivestoprotecttheplanetandthepeople
who dependon it not because it'sfashionable, butbased on thebelief that it's the
onlywaytodobusiness.

The Body Shop International plc is a global manufacturer and retailer of naturally
inspired,ethicallyproducedbeautyandcosmeticsproducts.ItwasfoundedintheUKin
1976byDameAnitaRoddick,havingnowover2,400storesin61countries,witharange
ofover1,200products.Foradditionalinformation,visit<www.thebodyshop.com>.
Information Systems in Purchasing Management 97
[8] InformationSystemsin
In this chapter the use of information
systems (IS) in the field of Purchasing
Management is presented. The chapter
focuses on methods and analysis tools
used within IS. The methods described
are EDI and Internet, where the latter
one is further presented in the areas of
B2B-hubs, other methods using the
Internet and e-market mechanisms.
Lastly the chapter elaborates upon the
problems that have to be considered
when using IS in purchasing.
Introduction
TheuseofInformationSystems(IS)withinthepurchasingactivitieshasincreasedrapidlysincemidto
late90s(SimchiLevi,etal.,2003).BenefitsofintegrationthroughdifferentISsolutionsaremanye.g.
improved business performance, increased revenues and reduced costs (GarciaDastugue, et al.,
2003).Oneofthemostcommonbenefitsisthatthetraditionalactivitiesthatmovedgoodsfromseller
to buyer such as transactional, facilitation and logistical activities can be performed with higher
efficiency and with a better time approach (Morris, et al., 2002). Further, when companies use
integration through IS they can be able to act more globally since the IS shrinks the world of the
marketandimprovestheaccessofinformation.Anotherimportantbenefitisthatthecostsinvolved
inprocurementcanbelowered.Thissincethepricescanbeloweredthroughauctions(Morris,etal.,
2002),customerscan useonestop shopping,reducethe transaction cost (Shevchenko, et al.,2005)
andhaveapaperlesstransaction(SimchiLevi,etal.,2003).Further,multiplebuyersandsellersbrings
togetherbytheuseofintegratedIS(Morris,etal.,2002)(Shevchenko,etal.,2005)(SimchiLevi,etal.,
2003)(GarciaDastugue,etal.,2003).
According to Morris et al. (2002) additional benefits, for the purchasing activities, of IS based
integrationcomparedtothetraditionalchannelsystemare:
U Reductioninthenumberoftraditionalmiddlemen
U Lowerinventoryandshorterinventorycycles
U Tighterrelationshipsbetweensellerandbuyer
U Powershiftsfromproducerandretailerstothecustomer
U Lowerpricesandgreatervarietyforconsumers
U Greaterresponsivenesstothecustomer
Shevchenko(2005)alsoaddressesthevalueofinformationsharingthatbecomesgreaterwiththeuse
of IS in the collaboration. IS provides opportunities for collaboration in e.g. webbased teamwork,
projectspreparationsandcollaborationofcomplementarybusinesses.Further,IScanbeseenasthe
gluethatefficientlybindsorganizationsordepartmentstogether(Weinberg,etal.,2007).
As seen there are several benefits and reasons for the companies to use IS in their purchasing
activities.ThefollowingsectionwillpresentcommonmethodsthatareusedforintegrationbyIS.
Methods
Inordertoestablishtheconnectionorintegrationbetweenacompanyanditssuppliersasystem(ora
group of systems) should play the interface role. In the world of IS, several methods have been
introduced for this purpose, ranging from businesstobusiness direct relationships via EDI 2 to other
broader mostly internetbased solutions. In this chapter, due to the increasing trend over ISbased
relationshipsolutions,thefocuswillbeonthesemethodsratherthanolderones.
EDI
AgenericformofelectronicrelationshipbetweentwocompaniesisEDI.Hill&Ferguson(1989)define
EDI as the structured and computerreadable business data transfer among and inside companies,
needless of rekeying between different business software applications. Historically, EDI was the
meansofdatatransferbetweentwoparties,avoidingalargeshareofpaperworkaswellasmistakes.
Duringtheyears,thespreadinguseofEDIamongstfirmsledtotheintroductionofdatainterchange
standards, primarily between trading pairs and later on as industrywide and EDIFAC and ANSI X12
standards,bringingflexibilityandbreadthtothemethod.AnimportantnotionintheworldofEDIis
VAN 3. VANs are interchange mediums for firms to access in order to establish more efficient EDI
connections. However, these mediums are more and more transferring their tasks to the Internet
(Albrecht,etal.,2005).
Albrecht, et al. (2005) suggests EDI for efficient pairwise relationships, where automatic
replenishmentcanbeused.Themainadvantageofthismethodishavingstandardframeworksthat
playtheroleofabasisforeasytransactionofpracticalbusinessdata,linkingtwofirms.EDIhelpsto
reducetimedelays,wagesandemployeecosts,errors,safetystocks(totalinventorylevels),aswellas
uncertaintiesinordertransfertime,processingandpayment(Hill,etal.,1989).Onthenegativeside,
EDItransactionsarenotdesignedtoeasilythusdoesnotwithoutdifficultyallownewactorsintotheir
relationships. This leads to a decreased chance of being used in emarkets, and less product and
producervarietypossibilities(Albrecht,etal.,2005).
CaseStudy:BASACo.AnexperiencedERPimplementer
BASA Co. was named the first ever ERP implementer in the Iranian industry when it
transformed one of its MIS 4 projects into an ORACLE ERP implementation in a large
sized steel manufacturer in Iran. Although having proficiency in IT as their core
competence, BASA Co. has so far used its skill in developing several solutions for e
commerce and egovernment, hence standing among the leading transaction and
infrastructure solution providers in both sectors. An interview with a systems analysis
expertinpurchasingsystemsresultedinthefollowingpracticalities.
2
ElectronicDataInterchange
3
ValueAddedNetwork
4
ManagementInformationSystem
First and foremost, companies are interested in adopting ITbased purchasing

managementsystemsinorderto
Havetheirpurchasingcycleandactivitiesorganized;
Omitmanualcommunication,allredundantwork,andtheirinevitableerrors;
Ensureabouttheeffectivenessofcompanyguidelinesonallpurchases;
Findpurchasingbottlenecks;
Obtainacomprehensivedatabaseofsuppliers,andsuitabletoolstoevaluatethem;
Increasethepurchasingvisibilityformanagers;enhancethecollaborationbetween
purchasingandotherdepartments;
Unifythedocumentation;and
Reducingtotalpurchasingcosts.
Onthenegativeside,therearealwaysproblemsandhardshipswithimplementingsucha
system.Amongallaretendencyforkeepingbusinessdataprivate,ratherthansharingit;
fearfrombeingmonitoredamongstoperationallevels;naturalresistancetochange;lack
ofknowledgeabouttheoutcomes;suppliersresistancetochange;andhumanfactors
related to strict obedience of the ITbased purchasing systems working methods
(Mousavikhah,2008).
Internet
ThesecondmajormethodforlinkingdifferentfirmsistheInternet.Beingavalueaddingchannelfor
distribution title flow (Rosenbloom, 1995), Internet is a vital driver for the organizational strategic
prospectinimprovingpurchasing/distributionactivities.Internetisabletoencompassallchannelsof
distribution andbring about the best possibletimely solutions for different occasions (Weinberg, et
al.,2007).SeveralmethodsarebasedonandworkwithintheplatformoftheInternet,includingB2B
hubs,companywebsites,eprocurementsystems,webservices,andsoon.
B2Bhubs
Oneoftheemergingelectronicmethodsforselling/purchasinggoodsandservicesamongfirmsisB2B
ehub. These hubs, just like network hubs, work as 3rdparty intermediaries that enable electronic
exhibition, search, data interchange (Shevchenko, et al., 2005), and transaction activities such as
negotiationandsigningcontracts(Albrecht,etal.,2005).OppositetoEDI,thesesystemsallowanyto
anybusinessdeals.Butinordertoavoidtoohugeprocessesandfacilitatesearchingandindexing,two
categoriesofverticalhubs(industry/marketspecific)andfunctionalhubs(function/businessprocess
specific) are introduced. VEBs (Virtual Enterprise Brokers) are also categorized within ehubs and
aims at solving arbitration problems among virtual enterprises and their clients (Shevchenko, et al.,
2005).
Users of eHubs can take advantage of singlepoint purchase, as well as enhanced product search
basedonthedesiredcriteriaandbroaderrangeofoptions.Thepurchasingprocesseshandledbythis
methodalsoresultinhighermarketplaceliquidityandqualityofpurchasingserviceswithlowertotal
transactioncosts.Furthermore,ehubsofferawiderangeofpossibilities,forinstancedistributionof
knowledge,mechanizedpurchases,andvalueaddedservices(Shevchenko,etal.,2005).
Onthecontrary,ehubsareprettymuchreliantonthesizeoftheirsupplier/customerbaseandtheir
connectivity to other hubs. Therefore, in many cases they fail to deliver ranges of products and
suppliers/customersthatareexpansiveenoughtobeworthwhiletobereferredto.Anotherproblem
is with price search and comparison feature of ehubs. This feature in some cases neutralizes the
purchaseamountbased price differentiation strategy. Further drawbacks can also be named as
deficiencyinchannelcoordinationcapabilities(especiallyincasesofalreadyestablishedrelationships),
as well as costs and functionality obstacles related to the variety of integration standards each of
whichmainlyhascreditwithinahub,notinhubtohubrelationships(Albrecht,etal.,2005).
SimchiLevi,etal.(2003)identifiesfourdifferenttypesofemarkets;valueaddedindependent(public)
emarkets, private emarkets, consortiabased emarkets and contentbased emarkets. The main
differencebetweentheseistheprivateorpublic/consortiaapproachofthemarket,seeTable17.
Privatemarketplace Public/consortiamarketplace
Independentowneroragroupofcompanies
Owner Asinglebuyer
fromthesameindustry
1.
Share proprietary data
1. Buying and selling commodities by
including product design,
focusingonprice
demand forecast and
Objectives 2. Findingnewsuppliers
productionplans
3. Buying and selling excess inventory and
2. Allow for logistics and supply
capacity
chaincollaboration
Participants Selectedgroupofsuppliers Openmarket
1. Subscriptionfee
Buyercost Buildingandmaintainingthesite 2. Licensingfee
3. Transactionfee
Supplier 1. Transactionfee
Nofee
cost 2. Subscriptionfee
1. Recentcollapseofmanymarketplaces
1. Initialinvestments 2. Objectionsbyreferredsuppliersbecause
Main
2. Data normalization and ofpricefocus
problems
Uploading 3. Sharingofproprietaryinformation
4. Datanormalizationanduploading
Table17Differencebetweentheprivateandpublicmarketplaces,(SimchiLevi,etal.,2003)
OthermethodsusingInternet
For the purpose of building the commercial connection between the purchasing activities of a
companywithitssuppliers,severalothermethodsareusedintheindustry.Amongall,twoofthese
methodsarebeingdiscussedhere.
Supplier websites form a very common category of these methods. This way, companies present
themselves in islandshaped websites, not easily letting automatic integration of purchasing/selling
activities, and consequently requiring human partaking in such activities. This problem is majorly a
result of websites not having standardized formats for exhibition of products and services,
contractingandtransactions,etc.Accordingly,thesetoolscannotbewidelyusedformasspurchasing
activities.(Albrecht,etal.,2005)
Anotherwidespreadpurchase/supplycommunicationmethodiseprocurementsystem.Thismethod
isbestutilizedindecentralizedpurchasingactivities,whereseveralpointsinanorganizationareable
to decide on purchase orders of their needs (Albrecht, et al., 2005). Through electronic links, these
orders are transmitted to specified suppliers and transactions are formed, mostly, on the basis of
centralizedagreementsandcontracts.Althoughthesemethodsaresubjecttoclosenessandlimitation
invarietyofsuppliers,itismostlyusedfortheprocurementofindirectmaterialsandMROgoodsand
services,wherenostrategicpurchasingdecisionmakingisrequired.(Albrecht,etal.,2005)
Theuseofemarketmechanisms
Inordertobeabletoreachthelargeramountofsuppliersandmaterialavailablethebuyingfirmcan
usedifferenttypesofemarkets(SimchiLevi,etal.,2003).Thissectionwilldescribethecharacteristics
ofemarketandtheirmechanismssuchasauctions,electronicpurchasingaidsandelectronicagents.
Theemarketservesasanintermediarybetweenthesupplierandthebuyer,whichhelpsthebuyerto
increase,identify,qualifyingthenumberofsuppliersengagedinthebiddingeventandtoconductthe
bidding event. Further, the internetenabled coordination helps the company in several aspects for
instanceinformationsharing,auctionsandtoconnectmembersofthesupplychainthroughelectronic
agents(GarciaDastugue,etal.,2003).
Fortheuseofemarkettransactionsinformationsharingisneeded.Theinformationthatisrequiredis
limitedtothetransaction(e.g.productdescriptionandotherinformationneededforthebuyerand
sellertounderstandwhatobjectthatisupforthetransaction)anddoalsoincludeinformationabout
deliveryandpayment(GarciaDastugue,etal.,2003).
Theprimaryuseofemarketsforthebuyerhasbeentoreducethetransactioncostandthepriceof
the purchased item (SimchiLevi, et al., 2003). However, the sustainability of the competitive
advantage of the market mechanisms is not likely to occur; more likely is the occasion of reaching
someitemsatlowerprice(GarciaDastugue,etal.,2003).Emarketsareusefulforthecompanywhen
the importance of the involvement and in the relationship with the supplier is low and therefore a
riskytooliftherelationshipbetweenthesupplierandbuyerisvaluable.Duetothecharacteristicsof
low involvement in the relationship the transaction cost is important to consider when selecting e
marketmechanism.(SimchiLevi,etal.,2003).
Auctions
Auctionsareamarketmechanismwherethebuyerandselleragreeupontheitemandthepurchase
price. The auction can be seen as a onetime transaction since the bidding process can select
difference winner each time. There are several types of auctions but the most common are the
progressiveorstandardauctionswherethebidsarefreelyplacedandtheauctionstopswhenthereis
nopurchaserthatwantstoplaceahigherbid(GarciaDastugue,etal.,2003).
Anotherexample of auctionsis thereverseauction. This one is common in the businesstobusiness

area.Forreverseauctions,itisthepurchaserthatsellsacontractofapredefineditem.Theobjective
inreverseauctionsistoplacethelowestbidinordertogetthecontract.Oneoftheconditionsofthe
reverse auctions is that the seller is unknown for the buyer until the bidding is over. This makes it
importantthatthedescriptionneededtodescribetheitemislowinordertodecreasetheriskofthe
processe.g.thatasuppliergetthebidbutisnotcapabletosupplythespecificitem.(GarciaDastugue,
etal.,2003)(Tassabehji,etal.,2006)(Kenczyk,2001)
A more complex type of auction is the multidimensional auction. As the name indicates, several
aspects are considered in the bidding e.g. the price and the quantity could be used in a two
dimensionalauction.Otherdimensionsuchasthepriceanddeliverycouldbeusedinordertosecure
demand in peak seasons. Multidimensional auctions might be good to use in order to match the
buyersneedwiththesellersavailabilityandcapacity.(GarciaDastugue,etal.,2003)(Branco,1997)
Afourthtypeofauctionistheclosedauction.Inclosedauctionthetransactionispreparedintheway
thatthesuppliersareprequalified.Sincetheclosedauctionrequiresthatthetransactionisprepared
with detailed descriptions and to write a contract the auctioneer have to be more active than in a
standardauction.Closedauctionsaretypicallycarriedoutforthepurposeofreversedauctions,andit
isalsosuitableformorecomplexitemsduetothepreparationoftheauction.(GarciaDastugue,etal.,
2003)
Regardlessofthetypeofauctionstheyareseenasaonetimetransaction.Ifthecompanywishesto
decreasethenumberoftransactionthebuyercould(forreverseauction)auctionanentirecontract
thatcoverssupplyforacertainperiodintimeorquantity.(GarciaDastugue,etal.,2003)
Finally,aproblemwithauctionsisthattherelationshipbetweenthebuyerandsellerdecreases.Also,
thebenefitsaremostlyconnectedtothebuyerside.Besides,thebuyerinstandardauctionsandthe
supplier in the reverse auctions get stressed when they have to place a bid during time pressure
(Tassabehji, et al., 2006). Another issue with auction is that they are most suitable for commodity
itemssuchasrawmaterialorstandardizedcatalogueitems(Kenczyk,2001).
Othermechanismsforemarkets
Thegroupofelectronicpurchasingaidsisanemarketmechanismthathelpsthecompanytofindthe
bestsupplierwiththelowestcost.Itisasetofsoftwarethate.g.usedifferentsetupsofmatricesin
ordertodetectitemsthatareoverpricedorhaveabetteralternative(GarciaDastugue,etal.,2003).
The electronic purchasing aids can be divided into two groups; individual based agents and
collaborativefilteragents.Theindividualbasedapproachusethespecificationsanddirectionsthatthe
userhasaddedtothesystemandusethemassearchcriteria.Thecollaborativefilterapproachuses
thesameinformationastheindividualbasedapproachbutitalsocomparetoothercustomerscriteria
onsimilarproductsandconductalistofalternativesfortheuser(Ariely,etal.,2002).Otherexamples
ofpurchasingaidsareelectroniccatalogues,recommendationsagentsandpricesearchengines.The
use of electronic purchasing aids could be time consuming since the purchaser has to compare his
decisionwiththedecisionaidandevaluatetheoutcome.Further,thetoolsaspricesearchenginesand
electroniccataloguesrequireahighlevelofdetailandstandardizationinordertoprovideavalidresult
(GarciaDastugue,etal.,2003).
Anothermechanismforemarketsistheelectronicagents.Thatissoftwarethatcontinuouslysearches
forbusinessopportunities,whichisdoneinthewaythatthesoftwarelinksthebusinessgoalswiththe
customerinterest.Electronicagentsperformbusinesswithallpossiblesuppliersandbuyersandthe
transactionoccursasonetime.Inorderfortheelectronicagentstoworkproperlytheaccuracyofthe
informationisimportantascleartermsofdeliverydateandthatthepurchasingdecisionsrulesareset.
(GarciaDastugue,etal.,2003)
Analysistools
Inseveraloccasionsacompanymightneedtoperformananalysisuponitspurchasingactivities.This
mightbetriggeredbytheneedfordecidingwhichsuppliertopurchasefrom,havinganinsightonthe
feasibilityofcurrentcontracts,betterservices,forexamplereductioninleadtimes,andsoon.Since
theamountoninformationisincreasingISareusefulinordertogettheanalysisdonemoreefficient
and accurate. Below some analysis tools for purchasing will be presented which mainly focuses on
cuttingcostsandleadtimereduction.
One of the most important aims of purchasing analysis is costreduction. For this purpose, several
toolshavebeenintroduced,amongwhichtheCostedBill,PurchasePriceVariances,andPurchasingcost
management tools are of significance. A Costed Bill is a tool for spotting the purchased goods and
services in which the total product cost is affected the most. In the same respect, Purchase Price
Variancesactasatool,whichshowsthepointsinpurchasingactivitieswhereexcessivecostsarebeing
initiated(Hamilton,2003).Usingtheaboveinformation,purchasingmanagerswillbeawareofwhat
positionsintheiractivitiestheywillhavetofocusoninordertocutcosts.
Moreover, Ellram (1996) provides a comprehensive framework for employing different cost
managementtoolstoapurchasingclassificationmatrix,closetotheKraljicmatrix(Kraljic,1983).First
ofall,severalquestionsareaskedinordertolocateeachpurchasediteminthematrix,consistingof
twodimensions:Natureofpurchase,andrelationshiptype;resultinginfourcategories:Lowimpact,
Leverage, Critical projects, and Strategic. After the positioning of all purchases, various tools and
techniquesareusedtoanalyzethedataofeachcategorypurchases.
Anotherintentionforpurchasinganalysisistomeasureotheraspectsimportantforpurchasedecision.
Forexample,Leadtimeanalysistoolhelpsthegroupofpurchasingandproductionmanagersreduce
totalproductlead timesbypointingout the most influential steps of purchasingand production on
lead time. Additionally, Problem vendor tools provide purchasing managers with the ability to track
qualityanddeliveryrelatedtoeachmemberofthesupplierbaseandevaluatesthemintermsoftheir
service. There are also some further movements, in the world of science, for bringing the hightech
knowledgeintothepracticeofpurchasing.Amongthem,theworkbyLau,etal.(2005)canbenamed
as a significant one, trying to introduce the AI 5 concept into the knowledge sharing and decision
makingforpurchasingactivitiesofthefirm.TheytriedtocombinetheOLAP 6technology,inorderto
take advantage of its processing and analysis competencies, with neural networks model, for
benchmarkingthesuppliers,resultinginasuggestionforthebestsupplierforeachpurchase.
ITdrivenproblemsin
purchasing
Eventhoughinformationtechnologyhasimprovedtheperformanceofthepurchasingorganization,
the use of IS does have some challenges both internally (Hamilton, 2003) and externally (Garcia
Dastugue, et al., 2003) that the company have to manage. The challenges below are related to the
choiceofthedifferentmethodsandwhatthecompanyhastoconsiderintheselectionprocess.
Internally the main challenge for the purchasing department is to decide for what purpose the IS
should be used. There are several benefits and drawbacks with the different methods and it is
importantthattheorganizationunderstandswhatconsequencestheywillhave.Forexample,thetype
of products purchased and the supplier relationship have to be considered in the selection of IS
method.Theauctionsareasseenbestsuitedforcommodityproductsandwheretheinvolvementin
thesupplierrelationship islowand thislimitation of the mechanismhas to weight against the price
reduction and lowered transactional cost that can be achieved (GarciaDastugue, et al., 2003).
Moreover, the initial cost that EDI requires for the set up of the system is another limitation the
customerhastoconsiderwhenselectingmethodforISandthatEDIisnotdesignedtoeasilyletnew
5
ArtificialIntelligence
6
OnlineAnalyticalProcessing
actorsintothesystem(Albrecht,etal.,2005).Asseenthereareseveralstrategicdecisionsthathasto
bemaderegardingtheISanditsmethodsandthegoalsandvisionsthatthecompanyhas.
Another important issue, regarding the strategy of the use of IS and its methods, is how the
purchasingdepartmentsstrategyisinlinewiththewholeorganization.Asseeninthestudycaseof
BASA Co they have faced the challenges in there IS implementation. Here, the companies have
problemswiththeISsincetheydonotknowwhattoexpectfromthesystems(Mousavikhah,2008).
Also, for the purchasing employees to evaluate the action messages correctly the IS have be
connected with the companies delivery frequency and production pace (Hamilton, 2003). This
indicatesthatthecompaniesneedstohaveaplanoftheISthatisworkedoutindetail.Evenifitisthe
purchasing department that should be improved it cannot be done in the way where sub
optimizationsaremade.
The internal challenges that are on a more operational level are often connected to the lead times,
impracticable lotsizing logic and inaccurate buyer action messages (Hamilton, 2003). This could be
causedbyseveralreasonse.g.thecompanyusinginflatedleadtimesthatcreatesincreasednumberof
recommendations in buyer actions or the customer use unrealistic lotsizing logic that make the
systemignoreactionmessages.
Oneoftheexternalchallenges,connectedtotheinformationsharingwiththeirsuppliers,istheaccess
ofinformatione.g.inehubstheinformationisonlyavailableforsomeactorsandnottoothersinthe
supply chain (GarciaDastugue, et al., 2003). An additional aspect with the information sharing was
seenintheBASACocasewheretheyhavefacedanunwillingnessofsharinginformationthatareseen
as important for the company (Mousavikhah, 2008). It can therefore be seen as critical that the
companies understand what type of information that is needed to be exchanged and that they can
trusttheotheractorsinvolved.Also,itisimportantthatthecompanyunderstandthatthereisatrade
offwiththelevelofcommitmentandlevelofinvolvementintherelationshipwiththewillingnessof
sharinginformation(Gadde,et al., 2001).Another asymmetry thatcan occur is the power structure.
Thepowercanbemovedbetweentheactorsinthesystem.Moreover,sincetheinvolvementinthe
relationshipdecreasewiththeuseofIStheriskforthatisthatasuppliercanendangerconfidentiality
withcompetitorincreases.Thisalsoindicatesthatthesupplychaingetsmorecomplexwiththeuseof
IS.Athirdaspectisconcernedthemanagementwillingnesstoshareinformationtoothermembersof
thesupply chain. Further, for the integration with external members to work, it isrequired thatthe
internalintegrationoftheISiscorrecte.g.thatthepurchasingdepartmentinformationislikedwith
the use of material in production and inventories levels or with market in order to get information
regardingplannedcampaigns.However,thisisnotalwaysthecase.Lastly,theuseofstandardsinthe
methodsisachallengethatthecompaniesneedtoconsider(GarciaDastugue,etal.,2003).
Finally,asseeninthischapterthereareseveralbenefitsthatcompaniescouldgetbyusingISintheir
purchasing activities. By considering the wanted and expected outcome of the system and the
challenges that the company could face with the IS and the different methods the company has to
selectthesystemthatbestmeetstheirdemands.
Supplier Selection with focus on choice of evaluation criteria 107
[9] SupplierSelectionwithfocus
onchoiceofevaluationcriteria
Supplier selection is one of the most
crucial decisions buyers make. This is
mainly due to the complexity of supplier
selection decisions. The supplier
selection influences the strategy of a
corporation and its supply chain. To
facilitate this strategic decision, many
models and methods are introduced by
researchers. Some of them try to solve
this problem mathematically and some
of them approach it from a qualitative
point of view. This chapter copes with
the importance of the supplier selection
step in the purchasing process.
Introduction:Whyissupplier
selectionimportant?
Thepurchasingprocess,accordingtoVanWeele(2005),consistsofsixmainsteps(figurebelow)and
supplier selection is one of these six main steps. Supplier selection is often a strategic multi criteria
decision,sincethatwayofworkingoftenseemstobethebestwayofaliningthesupplierselection
processwithacretincompanystrategyorwithacompanysoverallgoals.Findingtherightsupplier
canbringcostefficiencyintobothgoodsandservicepurchasing,whichoftenleadstothatacompany
increases their competiveness (Wu, 2007) (Bo van der Rheea, 2008) (Ng, 2008). According to
Ramanathan (2007) the selection of the right suppliers also has a significant role regarding quality
assuranceofacorporateorganizationoutputs.
Determinationof Supplier
purchasing Contract Ordering Expediting Evaluation
specification selection
Figure23Purchasingprocess(VanWeele,2005)
Togodownonelevelintheprocesshierarchyitisnoticeablethattheprocessofsupplierselectioncan
be described or divided into five steps (de Boer, 2001) (Sonmez, 2006). The steps that have been
chosentodescribethesupplierselectionprocessinthischapterarethesefour:definingthesupplier
selectioncriteria,narrowingdownthesupplieralternatives,finalselectionandcontinuousevaluation.
The focus of this chapter are on the first and the third steps, define the supplier criteria and the
finalselection.
narowing
Define supplier Final Continues
downthe
selectioncriteria selection evaluation
alternatives
Figure24Supplierselectionprocess
Whatcriteriashoulddecision
makersfocuson?
Tobeabletopicktherightsupplier,aselectioncriterianeedstobedefinedandafterthatthesupplier
selectiondecisionneedstobebasedonthesecriteria.Manyresearchershavedefineddifferenttypes
ofcriteriawhichalsooftenareusedinpractice.Dickson(1966)madeacomprehensiveresearchand
has defined 23 types of criteria that buyers uses for decision regarding supplier selection. Other
authorslikeRoa(1980),Ellram(1990),andStamm(1993)introducedanddefinedothertypesofmore
detailed criteria based on their researches. However, Katsikeas (2004) grouped them in four broad
areas; i.e. Competitive pricing, Reliability, Service, and Technological capability. It is here worth
mentioning that these supplier criteria often are both of qualitative and quantitative approaches
whichsometimesleadtodifferenttypesofconflicts.Othermorespecificmaincriteriathatcompanies
often focus on are: quality, price, delivery lead time, performance history and technical capabilities.
Thesuppliercriteriadonot havethesameweightforallkindsofcompanies.Othertypesofcriteria
havealsocomeintothisarenabecauseofincreasingattentiononglobalpurchasingandsupplychain
management. One example of new criteria in this area are those based on factors regarding
environmental impact. Companies do often now for example consider the emission level of their
suppliersintheselectionprocess.AlsoAgilityandTotalQualityManagement(TQM)factorsarenew
criteria that have been added to the agenda within this field. It is important to remember that
depending on the area of companys competence and on the companys overall strategy some of
thesejustmentionedcriteriaplayamoreimportantrolethanothers.
Supplierselectionmethods
Since supplier selection is a complex multicriteria decision which has a dominant impact on the
corporate strategy, a systematic method is required to accomplish the critical action of supplier
selection. The complexity of a whole supply chains or the complexity of a wide global network of
suppliersdoalsocontributetothecomplexitywithinthisarea.
To assist the decision makers many methods and tools have been introduced and applied.
InvestigationsperformedbyforexampleDeBoer(2001),Sonmez(2006)andGece(2007)areallthree
presentingexamplesofrelevantmethodsandtoolswithinthistopic.Sonmezcategorizedtheminsix
method clusters and the clusters consist of methods which are: conventional multicriteria decision
making (MCDM) methods, mathematical programming approaches, artificial intelligent and expert
systems, and multivariable statistical analysis. Two other examples of method clusters are group
decision making and multiple methods which. The main methods which are emphasized in these
publicationsarelistedinTable18.
Huang (2007) mean that the supplier selection process is more a strategic decisionmaking problem
ratherthananoptimizationproblem,sincethenatureoftheseproblemsisfullofconflictingcriteria
andcomplexity.Facingtheseproblemswithoptimizationmethodsneedsanobjectivefunction,mainly
costminimization.Mathematicaloptimizationapproachesareonlysuitedforquantitativecriteria,but
in practice supplier selection problems are full of qualitative criteria as well. Dulmin (2003), also
suggestedusingmulticriteriadecisionmaking,sincehebelievesthattheoptimalsituationisinfeasible
andthecriteriasweightshavetobebalanced.
Multicriteriadecision Mathematical Multivariatestatistical

Artificialintelligence
making programming analysis
Totalcostbased
Structuralequation
AHP,Outranking approaches,Nonlinear Neuralnetwork,Case
modelling,Principle
method,Judgmental programming,Mixed basedreasoning,
conceptanalysis,
modelling,Multiple integerprogramming, Bayesianbelief
Confidenceinterval
attributeutilitytheory Linearprogramming, network
approach
Goalprogramming
Table18Exampleofdiferentsupplierselectionmethods
As discussed earlier, supplier selection is a strategic decisionmaking problem and treating it as an

optimization approach may not be helpful. Among these methods, the application of AHP (Analytic
Hierarchy Process) is more elaborated in articles and has been a popular approach for supplier
selectionamongindustriesandpractitioners.AHPisarobustmulticriteriadecisionmakingapplication
developedbySaatyinthe1970s(Saaty,2001).AHPisamethoddevelopedtohelpdecisionmakersto
handlecomplexdecisions.Thehierarchyconsistsof3elements;goal,criteriaandalternatives.Criteria
areselecteduponthedecisionmakerspreferencesandtofacilitatethedecisioncanbegroupedand
have sub criteria. Bevilacqua (2006) stated that the majority of decision makers does not consider
morethat8or9criteriaintheirproblemtoeasethecomplexityoftheproblem.Ontheotherhand,
Saaty (2001) suggests that the number of criteria should be 7 2. Therefore decision makers must
select a limited number of criteria which they believe fits their task best. This could be handled by
grouping decision makers in discussion teams. The AHP method tries to solve the problem
mathematically. It transforms the respondents perception to numerical values by pair wise
comparisonoftwocriteria;i.e.eachcriterioniscomparedtoothercriteriainitsimportancecompared
toothersina1to9scale.Lateronthesenumericalvaluescanbeconvertedtoweightsorpriorityfor
each criterion bymatrix operation. These priorities help to choose the best alternative; i.e. the best
supplierwhichbestsuitstheselectedcriteria.

Figure25Criteriaandsubcriteriainsupplierselection
Buthowdomanagersdecideinrealitywhentheyfaceconflictingobjectivesindecisionmakingamong
cost,availability,flexibilityandquality;thefourmaincriteria?AccordingtoVerma(1998)managerssee
qualityasthemostimportantcriterion.However,theweightsofcriteriashowthatwhentheymake
decisions in reality, they prioritize cost and flexibility beat quality. Verma used conjoint analysis to
conclude this. However AHP can come to the same result. Since the method uses a pair wise
comparisonoftwocriteriaandthepossibilityofactualweightingishigh.Alsoattheendprioritization
ofcriteria,decisionmakerscanbalancetherankingtomakeunbiaseddecisions.
Servicesupplierselection
Theapproachestowardspurchasingofgoodsarecompletelydifferentcomparedwithpurchasingof
services.AccordingtoDegraeve(2004)thesetwobroadcategorieshavethreemaindifferences.Their
maindifferenceistangibility.Servicesareintangibleandtheirperformancecantbeperceivedaswell
asgoods,thusmakingsupplierevaluationandselectionmoredifficult.Secondly,theproductionand
consumptionofservicesareusuallyatthesameplaceandtime.Thirdlytheservicescantbestoredas
products. Many supplier selection methods have been introduced for the purchasing of goods.
However there are only a small number of publications available for supplier selection in service
purchasing. Also, Fitzsimmons (1998) noted a difference between purchasing of service and goods
anditwasthatservicesareexperienceswhichcannotbeduplicated.
To describe what a service really is these examples are worth mentioning: office and production
equipment maintenance, computer maintenance, building repair, waste disposal, product testing,
temporarypersonnel,security,foodservicesandconsultancy.
AsnotedbyFitzsimmons(1998)inasurveyinthemid1990sbytheNationalAssociationofPurchasing
Managementuncoveredthatmorethanhalfofthepurchasingmoneywasspentforservicesandnot
for goods. Also, services have a broad impact on corporations and people working there, but a
product in form of goods usually does not. Besides services, in most of the cases, the supplier
selection process needed to be adjusted and customized to better fit the service and the own
organization. These reasons show the importance of service supplier selection in purchasing
processes.Unfortunatelytheonlyavailableservicesupplierselectionmethodfoundinthisresearchis
amethoddevelopedbyDegraeve(2004)whichtriestosolvethisservicesupplierissuemathematically
bytheusingtheconceptoftotalcostofownership(TCO).Becauseofthislackofrelevantliterature
there are many gaps within this area which also mean that it exist many opportunities for future
research.
Casestudy:Indoorclimate
IMIplcisaworldwidecompanywhichdeliversinnovativeengineeringsolutionstoglobal
customers. Their headquarter is located in the Birmingham Business Park. They have 5
mainbusinessareas:Severeservice,Fluidpower,Indoorclimate,Beveragedispense,and
Merchandising. The core characteristics of IMI businesses are product differentiations,
customer relationship and a leading position especially in Europe. Indoor Climate is a
wellknown company with 2,000 employees, 300 billion euro sales and 50 million euro
profit.ThefocusofthecompanyistoperfectingIndoorClimatesthroughouttheworld
withmainfocusoncomfortofthepeopleinsidethebuildingandtheenergyefficiency.
Thecustomertargetistheheatingandcoolingsystemsforcommercialbuildings.Alsoit
focuses on balancing systems and temperature control. The production plants are in
Sweden, Germany, USA and recently in Switzerland. The sales offices and agents are
situatedaroundthewholeworld.
The IMIs purchasing organization is shown by the figure below. Each Business unit is
independent but coordinated by a Global Supply Chain Director who is responsible for
settinguplocalGlobalSupplyOfficesinlowcostcountrieslikeChina,India,Vietnamand
Mexico. Each Business is led by a Procurement Director to whom all companies
PurchasingManagers(withintheBusinessunit)reportto.
GlobalSupplyChainDirector
Procurement Procurement Procurement Procurement Procurement

Director Director Director Director Director
Purchasing Purchasing Purchasing Purchasing Purchasing

Manager Manager Manager Manager Manager

Figure26PurchasingorganizationatIMI
IndoorClimatepurchasingspentis100Millioneuroofwhich70%isinEuropeand30%is
IndoorClimatepurchasingspentis100Millioneuroofwhich70%isinEuropeand30%is
inUS,China,andrecentlyinIndia.Althoughithasitsmainproductioninitsownplantin
Sweden,butfornoncoreproductsithasalargesupplybaseandcontinuouslysearches
forandinvestigatesnewpotentialsuppliers.TheIMIssupplybasecontainsaround6000
suppliersofwhich650suppliersdealwithIndoorClimate.Theglobalsourcinggoalwas
to reduce the cost of purchased goods. The purchasing department defined 5 main
criteriawhicharePurchasePrice(P),Quality(Q),Leadtime(L),Cost(C),andsatisfaction
ofbasicspecificationoftheproduct(S).Butsincetwoyearsbefore,itsmainfocuswas
only on cost rather than other criteria when selecting the supplier. Faced by many
drawbacks such as quality, leadtime and logistical problems, it introduced a new
methodforsupplierselectionwithanewapproach.Itfocusesonothercriteriatomake
abalancebetweenthem,i.e.notfocusingaloneontheprice.Thereforethepurchasing
organizationconsiderspurchasingasastrategicdecision.
First for a new product the purchasing department searches for potential suppliers in
their database, since the intention is to have a long term relationship with previous
suppliers. At least one new supplier will be selected, in order to stay in touch with
changesinthemarket.Therefore,thedepartmentmakesaroughassessmenttoselect
510 suppliers only based on the 5 main criteria (PQLCS). Following this step, they
requestsuppliersforquotation(RFQ).Inthisstep,themostimportantcriterionisprice.
This means that even if the best supplier offers a higher price, the department drops
themfromthelist.Attheendofthisstep,35supplierscanreachthenextstep.Thenext
stepisthemostcriticaloneanditisthemosttimeandenergyconsumingone.Basedon
10broadcriteria,thepurchasingdepartmentdigsintoeachsupplier.Eachcriterionhas
many detailed questions which can be seen as subcriteria. The department asks the
supplier to answer each question with consideration. Usually each questionnaire has
morethan50pages.Eachquestionhasaweightandintheendeachbroadcriteriaand
each supplier will be ranked by the department. Thereafter the department selects 13
suppliers. Sometimes it is necessary to visit the supplier before the decision and the
purchasingmanagerordirectorvisitsthempersonally.Howeveritisnotthecasethatif
a supplier has a higher rank, it will definitely selected. Many times the department
selects based on other factors such as that a supplier plans to introduce a new
laboratory or machine in a few months. The selected supplier in this step will be
screenedoncemore.Thisstepisgoingonbyacrossfunctionalteamwithapurchaseras
a leader. The team usually consists of employees from production, logistics, product
development and other managers if needed. By a discussion and consideration of all
areasandcriteria,theteamfinallydecidesononeortwosuppliers.Thismeansthatthe
highestrankedsupplierisnotnecessarilyselected;theteamdecidesafterdiscussion.In
most cases parallel sourcing is preferred to reduce the risk. The supplier selection
processoftheIndoorClimateisshownbythefigurebelow.
12suppliers
13suppliers basedoncross
basedon functionalteam
35suppliers supplier
basedonRFQ auditand10
broad
510suppliers criteria
basedonPOLCS
assessment

Figure27SupplierselectionprocessatIndoorClimate

The10broadcriteriathatthedepartmentintroducedarestatedbelow.
Componentrequirementandcompliance,Experienceandreference,Processdevelopment
andprojectplanning,Qualitymethodsandtechniques,Rawmaterialsandpurchasedparts,
Customercareandsatisfaction,Processstages,Processspecificationsandquality,Material
flow,Health,safetyandenvironment,andFinancial.
Onemaincriterionthatisrecentlyfocusedonalotishealth,safetyandenvironment.
Itisanemergingissueforthecompanyandtheycarealotaboutitandithasalmostthe
highestimpactonsupplierselection.Besides,thedepartmentdropsanycompanywhere
therearenotatleast23personsspeakingEnglishbecauseofpreviousexperienceswith
differentlanguagesandcultures.
Theproposedmethodisonlyforproductsupplierselectionandthecompanydoesnot
useanyspecialmethodforservicesupplierselection.Thepurchasingdepartmentselects
the service supplier based on gutt feelings. That means the only criterion that the
companyconsidersisprice.Othercriteriamustbeatleastatthedesiredlevel.
Summary
Supplierselectionisacriticalpartofthepurchasingprocessandhasaverysignificantimpactonthe
company.Therefore,manyliteraturesourcestrytosuggestalotofmethodsandcriteriatoconsider
for supplier selection. As shown in the case, the most practical and used approach is multi criteria
decision making. Since in many situations, companies cant or do not want to select the best
suggested supplier based on a mathematical approach. Although Indoor Climate does not use any
specialmethodofMCDM,theyuseacustomizedmethodforthecompanythatconsidersmanycriteria
atthesametime.Finallywiththeaidoftheguidelinesofthemethodtheychoosethesupplier.
Supplier selection using a fuzzy linear programming model 115
[10] Supplierselectionusingafuzzy
linearprogrammingmodel
This chapter gives an understanding of
the complexity of the supplier selection
process. The supplier selection process
often includes some kind of screening
of potential suppliers. Selection criteria
are also decided and often weighted
by the buyer. This chapter will present a
development of an AHP supplier
selection model which is combined with
a linear programming model. Finally,
the chapter also will presents a case
study in order to provide a better
understanding of the literature and
described supplier selection model.
Introduction
TheevaluationandsupplierselectionhasbecomeanimportantpartofthePurchasingManagementin
companies. The manufacturing department needs to have a supplier who is reliable and keeps
promisesinordertomaintainanefficientproduction.Supplierselectionbyusingalinearmodelthatis
described in this chapter is one of many ways when it comes to finding the best suitable supplier
availableonthemarket(Sevkli,etal.,2008).
However,themodelcouldseemtobeverydifficulttounderstandandtoimplement,butonceithas
beenimplementedbyacompany,theywillrealizethatthetimeandeffortittookfortheminorderto
selectthebestsupplieravailableonthemarketwasworththeimplementation(Sevkli,etal.,2008).
This chapter gives the reader an overview of how the selection is done from the beginning with an
emphasis on the hybrid approach were the fuzzy linear model in the end selects the appropriate
supplier. The method is applied on a real case within the appliance industry, based on a situation
where a Turkish company called BEKO needed to find supplier in order to produce TVs. The final
sectionofthechapterconcernsconclusionoftheapproach.
Thescreeningprocess
The evaluation and selection process is a multi stage process which involves several steps and is
illustratedinFigure28.Thescreeningofthesuppliersstartswithasourcingrequestfromthecompany
thatinitiatesafindingprocessinordertofindpotentialsuppliers.Thesourcingrequestcouldcontain
findingasupplierthatcouldprovidethesourcingcompanywithmaterialinordertoproduceaspecial
product.Anotherinitiatorcouldbethatthemanufacturerisdissatisfiedwiththecurrentsupplierand
needstofindanotheronetocovertheneeds(Robert,o.a.,1996).
Thenextstepcontainstwopreliminaryevaluationsforthepotentialsupplier.Thefirstoneisageneral
and preliminary screening process. In this step the supplier is evaluated in terms of financial
statementsandotherfactorsthatmightdisqualifythemintermsofrecentperformanceassupplier,
environmentalissuesetc.Atthispointthedecisionistodecideifthepotentialsupplierissuitableor
not.Ifthesupplierfailsonthisstageitwillbedisqualifiedandisnolongerappropriateofbeingpartof
thevendorsbusiness(Robert,o.a.,1996).
Thefollowingstep,ifthesuppliershavepassedthefirstone,istomaketestsofthepotentialmaterial
thatisgoingtobeused.Inordertodothisthematerialisbeingtestedandevaluatedinordertofind
outifthephysicalproductissuitablefortheproductionornot(Weber,etal.,1991).
Thelaststepinthescreeningprocessistoevaluatemorespecificallyonthepassedsupplierbyusing
specific criteria. The potential supplier will be evaluated more detailed and will be given scores
dependingonhowthecriteriaismanaged.Thesupplierwiththebestoverallscoreswillbeselected
andwillsupplythesourcingcompanyinthefuture.
Figure28Preliminarysupplierscreeningprocess
Supplierselectioncriteria
When the screening process has been made the potential supplier who remains has to go throw a
criterionstepwereitisanalysedintermsofsuitability.Thecriterionwhichisdetermineddependson
thereasonandbackgroundoftheoutsourcingdecisionofacompany.
During many years now the criteria have been changed due to better communication system and a
moreleanwayofthinking.Duetotheconceptofjustintime(JIT)companiesneedtohaveabroader
viewandnotfocusonlyatthepriceorleadtime.Hence,theobjectiveistofindthebestoneandnot
theonewhohasthelowestcostorthebestleadtimes.Becauseofthisthebuyingcompanyneedsto
lookatasupplierwithawiderperspective(Weber,etal.,1991).
Figure29belowshowsthesupplierevaluationstructureoftheBEKOcaseinordertoillustratehow
thestructurelookslike.Thestructureisdividedintofourlevelswerethetoplevelistheultimategoal
of the problem. The next level is the six supplier criteria. These are the ones who give the sourcing
company a picture of how the supplier is working and what the general contributions the supplier
couldoffer.Thethirdlevelisthesecondcriteriacomposedintomorespecificsubcriteria.Theseare
theonesthatdemonstratethebuyertheparticularcontributionsofasupplierandhowtheymanage
theirbusiness.Thesearetheonesthatcouldaffectthebuyerswhenitcomestotheselectionofthe
supplier. The fourth and last criteria represent the alternative suppliers that are available for the
vendor(Sevkli,etal.,2008).
Figure29Structureofsupplierselection,(Sevkli,etal.,2007)
Performanceassessment
This criterion gives the buyer a hint of the potential performance of the different suppliers that are
availableonthemarket.Itisdividedintotheperformanceoftheshipment,thedeliveryandthecost
ofthesuppliers(Sevkli,etal.,2007).
Humanresources
Thehumanresourcecriteriawillprovidethebuyerwithinformationaboutthenumberofemployees,
theorganizationalstructure,thetrainingoftheemployeesandfinallythenumberoftechnicalstaff.
Theimportantsubcriteriawithinthiscriterionarethetrainingoftheemployees.Thiswilldetermine
the knowledge of the staff in the suppliers organization and the willingness of improving and
maintain good quality of the provided contribution to the buyer. The number of technical staff is
importantifthe buyer is looking for a commodity that required a highly technical knowledge. If the
numberishigherthanforothersuppliersitisanadvantagefortheonewiththemosttechnicalstaff
(Sevkli,etal.,2007).
QualitySystemAssessment
This criterion gives an overview of the suppliers quality planning, quality assurance, management
commitment, inspection and control. The quality issues are important when it comes to both the
buyerandthesuppliersproduction.Ifthequalityispooratthesupplieritwillalsoaffectthebuyerin
anegativeway.Itcouldbeintermsoflackofcommoditiesordissatisfiedendcustomers(Sevkli,etal.,
2007).
Manufacturing
Themanufacturingcriteriaareimportantwhenitcomestotheknowledgeoftheproductioncapacity.
The buyer needs to know if the potential supplier could manage a peak in demand for example.
Furthermore the maintenance of the lead time, storage, development of the production and if the
suppliersareuptodatewhenitcomestoproductionistheothersubcriteria(Sevkli,etal.,2007).
BusinessCriteria
Thesourcingcompanywillgetanoverviewofthesuppliersbusinessinthiscriterion.Thecriteriawill
provide information about the suppliers reputation, location, patents, technology capabilities and
finallyprice.Howeverasstatedbefore,thepriceisnotthemostimportantcriteriawhenitcomesto
thedecisionofselectingasupplier(Sevkli,etal.,2007).
InformationTechnology
Information sharing amongst companies is becoming a more important issue. This criterion
determines the ability of the supplier to communicate with the buyer. The sub criteria within this
criterion are Radiofrequency identification (RFID), Electronic Data Interchange (EDI) and the use of
internetinordertocommunicatewitheachother(Sevkli,etal.,2007).

Theanalytichierarchyprocess
The analytical hierarchy process (AHP) has been developed by Saaty (2001) and is a powerful tool
whenitcomestothesolutionofselectingthebestsupplier.TheAHPcanbestructuredasshownin
Figure29asahierarchicallystructurecontaining4levelsasstatedinthepreviouschapter(Sevkli,et
al.,2008).
Asstatedthefirststepintheprocessistostructurethehierarchyanddecidetheimportanceofeach
criterion.Furtheronitisuptothedecisionmakertogiveeachofthesubcriteriaarankingbetween1
to9 were 1 is thelowest andstandsforequally preferred and 9 isextremely preferred. Thesecond
step is to make pair wise comparisons, concerning the weight and scores. The comparison of two
criteria needs to be done at the same level and will be given a numeral value regarding their
importance(Lookat [16]Appendicesforexample).Thelaststepistocalculateaweightedsumofall
thecomparisonsasshownbelowinordertogivethemaincriteriaascorethatthedecisionmakercan
workfrom.TheresultoftheglobalprioritiesRjisbasedonweights,viandthescores,rij.Theoutcome
oftheAHPapproachisillustratedinAppendicesandislaterusedinthefuzzylinearmodelintermsof
selectionofpossiblesupplier(Partovi,1994).
Rj=vi*rij
Equation1Theweightedsumofallcomparisons
Thefuzzylinearmodel
Thefuzzylinearprogramming(FLP)modelgivesthesourcingcompanyanotherpicturethentheone
deliveredfromanAHPmodel,whichwouldhaveselectedanothersupplierratherthansupplier2asit
isstatedinthefollowingcasestudy.Themodelwillgenerateabetterunderstandingoftheimportant
issuesregardingAclasscomponentwhichintheendwillgeneratebetteroutcomesforthesourcing
company. The model is made in order to provide a selection tool when it comes to the fuzzy
environmentsthatexiston theexistingmarkets.OrasSevkliM.(2008)stateintheirjournal: Since
there is a fuzziness and ambiguity in human judgment, conventional cooperation scale with the crisp
numberasproposedinSaatysAHPfailstoaddressthefuzziness
Basedontheweightsofthelocalweightsofthesupplierstatedinappendix1thelinearmodelcanbe
made. The calculation of the model is as shown in Equation 2, where the inputs are taken into
considerationandprovideeachmaincriterionwithafigurebasedontheoutcomeintheAHP.Further
on is the linear model calculated by the usage of the Xpress MP software which is a programming
softwaretoolusedinordertocalculateandselectthebestsupplier(Sevkli,etal.,2008).
Equation2LinearcalculationusinginputsfromtheAHPapproach,(Sevkli,etal.,2007)
Casestudy:BEKO,anappliancecompanywhousedthefuzzylinear
model
The case is based on a supplier selection by BEKO which is a major appliance
manufacturerbasedinTurkey.Thecompanyneededtoselectasupplierwhenitcameto
themanufacturingofTVtubes.Afterthescreeningprocesstheyfoundthreepotential
suppliers which could deliver and supply the required tubes. The main criterion for
selectingthesuppliersisthelongleadtimeofthetubes.Infacttheyhavethelongest
lead time within the manufacturing process of all the supplied items. Furthermore the
tubesarehighvaluecomponentsandareclassifiedasclassAcomponents(Sevkli,etal.,
2008).
Furtheron,BEKOdecidedwhichofthecriteriawasthemostimportanttothemandthe
onewhichwasofnoimportance.Theydecidedbecauseofthehighclassificationofthe
component and the long lead time that the manufacturing criteria was of more
importance which contains lead time, production capacity, maintenance, up to date
technology and transportation. The one they found as the least important criteria was
the quality system assessment which consists of inspection and control, management
commitment, quality planning and quality assurance. Next step for BEKO was to
calculatetheweightsofthecriteriabygivingall25subcriteriaascorebetween1and9
and then implement them into the calculation reviewed in previous chapters.
Appendicesillustratethe local weights of the different suppliers in the main criteria. A
detailedreviewoftheweightsisalsoshowninthere.Furtheronthefuzzylinearmodel
wasimplementedbasedontheinputsfromtheAHP.Theoutcomestatedthatsupplier2
was the most appropriated supplier when this model is used and the manufacturing
criteria are the most important one of the six main ones. However, if the selection of
supplierwasonlybasedontheAHPapproach,supplier1wouldhavebeentheselected
one. This statement illustrates the different outcomes when evaluating suppliers and
thatthefuzzylinearmodeldoessupplythecompanywithadifferentoutcome(Sevkli,et
al.,2008).
Conclusion
ThemodelismostpreferablewhenitcomestoAclasscommoditieswhichhavehighvalue.Thefuzzy
linearprogramming(FLP)willprovidetherightsupplierintheseenvironmentsandisacomplementto
theAHPmodel,wherebythetwoapproacheswilltogetherworkasahybridsupplierselectionmodel.
Because of the FLP the selection will be more reliable, since the model will take the fuzziness into
consideration and the uncertainty when it comes to the judgment of the ones who decide the
supplier.
Furthermore it is important to divide the criteria into the most important criteria and the least
important criteria in order to find the best supplier. The case study in this chapter has the
manufacturingcriteriaasthemostimportantsuppliercriterionwhichincludesmaintenance,leadtime,
productioncapacity,uptodatetechnologyandtransportation.Thiscriteriaisrecommendedtobethe
mostimportantcriteriaduetothehighvalueandlongleadtimetheAclasscommoditieshave.The
leadtimeforexampleandtransportationthatissubcriterionofthemanufacturecriteriaisofgreat
importanceduetothelongleadtimethecommoditieshave.Furthermoreistheproductioncapacity
ofimportancesincethecommoditieshaveahighvalueandthesupplierneedstodeliverthemevenif
there is a peak in demand. If they cant deliver the commodities because of limited production
capacity, it will cause the sourcing company serious problems in terms of production delays and
missedsalesopportunities.
Supplier selection using ISO standards 123
[11] SupplierselectionusingISO
standards
This chapter discusses how the ISO
standards, specifically ISO-9000 and
ISO-14000, can be used in a supplier
selection process. This is done by
comparing the most commonly used
supplier selection criteria with the
principles of ISO guidelines and
standards. In other words this chapter
will compare the practical way of
selecting supplier criteria with the
content of ISO documents. ISO
standards are international recognized
standards which are created to suit all
kinds of industries and companies.
Standardsandcertifications
InthischaptertheISO9000andtheISO14000standardswillbepresentedfollowedbyadescription
ofthecertificationprocess.TheISOstandardsareinternationalstandardscreatedtosuitallkindsof
industries and companies. Although there are many other standards, as for example the industry
specificstandards,thereisatrendtowardsadecreasingnumberofstandardsandanadaptiontothe
ISOstandardsformoreandmorecompanies(Bergman,etal.,2004)andthereforetheISOstandards
arethemostinterestingstandardstoinvestigateinthiscontext.
ISO9000
The ISO9000 series was issued by the International Organization of Standards (ISO), a non
governmentalorganizationestablishedtopromotethedevelopmentofstandardization,in1987.Ithas
sincethenbecomeaninternationalrecognizedqualitystandard(Wilson,1994).Thestandardisrevised
inregularintervals.Therewasabigrevisionin2000transferringitfromanobjectorientedapproach
toaprocessorientedapproach(Bergman,etal.,2004).
The ISO9000 series (hereafter referred to as ISO9000) consists of four parts: ISO9000, ISO9001,
ISO9004andISO90011.ISO9000coversthebasicsofqualitymanagementsystemsandalsocontains
thedefinitionsofconceptsandtermsfortheISO9000series.ISO9001containstherequirementsin
thestandardforaqualitymanagementsystem.ISO9004providestheguidelinesforimplementation
ofaqualitymanagementsystemaswellasprocessesforcontinuousimprovementsandworktowards
customer satisfaction. ISO90011 provides guidelines for carrying out audits related to quality and
environmentalissues.(Bergman,etal.,2004)
ISO9000isbaseduponeightqualitymanagementprinciplesthatcompaniesimplementingISO9000
shouldfollow(InternationalOrganisationofStandardisation2000):
1. Customerfocus:focusoncustomersandstrivetomeetandexceedcustomer
expectationsandrequirements.
2. Leadership:themanagementshouldestablishaunityofpurposeanddirectioninthe
wholeorganizationandcreateanenvironmentthatencouragespeopletobeinvolved.
3. Involvementofpeople:allpersonnelshouldbeinvolvedandusetheirfullabilitiesforthe
companysbenefit.
4. Processapproach:allactivitiesandresourcesshouldbemanagedasaprocess.
5. Systemapproachtomanagement:themanagementshouldhaveaholisticviewofthe
companytoreachitsgoalseffectiveandefficient.
6. Continualimprovements:continuousimprovementsshouldbeapermanentobjective.
7. Factualapproachtodecisionmaking:basealldecisionsoffacts
8. Mutuallybeneficialsupplierrelationship:thecompanyshouldhaveamutuallybeneficial
relationshipwithitssuppliers
ISO14000
The ISO14000 series was developed by ISO in 1996 and is a standard to improve environmental
performance. ISO14000 builds on the same principles as ISO9000 (Melnyk, et al., 2000). The ISO
14000 environmental standards specify the structure of information technology, in the form of an
environmentalmanagementsystemthatanorganizationmusthaveinplaceifitseekstoobtainISO
certification. The ISO14000 standards describe the basic elements of an effective environmental
managementsystem.Theseelementsincludecreatinganenvironmentalpolicy,settingobjectivesand
targets, implementing a program to achieve those objectives, monitoring and measuring its
effectiveness,correctingproblems,andreviewingthesystemtoimproveitandoverallenvironmental
performance(Feldman,etal.,1996).Itiscommonthatacompanysmanagementsystemsrelatedto
qualityandenvironment,e.g.ISO9000andISO14000,areintegratedintoonesystem(Bergman,et
al.,2004).
Certification
AlargepartrelatedtotheISOseriesiscertificationbythirdpartyauditors.ISOcertificationisnota
onetimeoccasion;itmusttoberenewedatregularintervals,usuallyaroundthreeyears(Curkovic,et
al.,1996).
ISOcertificationrequiresaseriesofsteps.First,thecompanydetermineswhichstandardsintheseries
areapplicabletoitssituation.Next,acompanyspecificqualitymanualisdeveloped,whichprovidesa
specific set of policies related to the implementation of the standards. Finally, a full assessment
follows,executedbyanonsiteteamthatverifiesthatthereisaprocedureinplacetomeasurequality
or environmental performance, there is a review process to monitor it and that there is a qualified
stafftocarryoutthepolicies(Curkovic,etal.,1996).
Effectsofimplementation
InthischaptertheeffectofimplementationoftheISO9000andISO14000standardsthatcompanies
have experienced, will be presented. The effects of implementation of an ISO standard are widely
debatedandtherearemanyqualitativeandquantitativestudiesavailablescrutinizingtheimmediate
andlongtermeffectsoncompanies.
ISO9000
ThemajorityofavailablestudiesshowthatimplementationofISOhaspositiveeffectsforacompany
(e.g. (Curikov, et al., 1999); (Melnyk, et al., 2000) (Gotzamani, et al., 2002)) and the fact that an
increasing number of companies all over the world are using the standards indicates this as well
(Casadess,etal.,2005).
Even more widely debated than whether there are possible effects or not, are what these positive
effectsareandtowhatextenttheyappearinthecompanies.Therearemanystudies,bothqualitative
and quantities, dedicated to this. The effects of implementing the ISO 9000:1994 and the ISO
9000:2000standardareverysimilardespitethedifferencesbetweenthembutthelongtermbenefits
fromISO9000:2000areexpectedtobegreater(Casadess,etal.,2006)butsincethelaterversionof
theISOstandardshaveonlybeenavailableforafewyearsthelongtermbenefitshavenotyetbeen
reached.
ThepositiveeffectsofimplementingISOstandardsarepresentedinFigure30.TheISOstandardsare
processoriented and as a result companies pursuing ISO certification are likely to fundamentally
change the underlying processes resulting in essential changes (Melnyk, et al., 2000). Certification
forcesthecompanytousemeasures,methodologiesandtoolsthatcanhelpthecompanytocreate
newopportunitiesforimprovementacrossmanycompetitivedimensions(Curikov,etal.,1999).
The most important benefits from implementation of ISO standards is related to the companys
operationsandcustomerrelations.ThemostcommonpositiveeffectisthatISOcertifiedcompanies
havebetterqualityoftenfollowedbybetterdeliveryprecision(e.g.(Poksinska,etal.,2003);(Curikov,
etal.,1999);(Casadess,etal.,2006)).Theyaremoreflexibleandresponsivetocustomersrequests(
(Poksinska,etal.,2003);(Curikov,etal.,1999)).Improvedproductivityisidentifiedby(Curikov,etal.,
1999) as a positive effect of implementation. There is evidence that implementation of the ISO
standardcancontributesignificantlytosuperiorfinancialperformanceandspecificallyimprovements
inreturnonasset(acommonlyusedindicatorofacompanysperformanceincomparisontoothersin
the same industry) primarily through increased productivity. In comparison to an otherwise similar
companyandISOcertifiedcompanyhaveamuchhigherincreaseonreturnonassetthreeyearsafter
thecertification(Corbett,etal.,2004).
There is a strong positive link between a continuous improvement strategy and improved business
performance (Terziovski, et al., 2007). The ISO standards encourage to continuous improvements.
Internal audits on regular intervals ensure that the company is continuously improving their
proceduresandmakesurethatallchangesarejustifiedanddocumented(Curikov,etal.,1999).
The ISO certification process forces the company to examine all its processes in detail and in this
processesnewopportunitiestoreducewasteorcutcostsoftenturnup(Curikov,etal.,1999).Over
time, certified companies go through a process of organizational learning that has a positive effect
wastereduction(Terziovski,etal.,2007).
The documentation process forces companies to formally establish procedures and the mere act of
documentation has enabled companies to uncover problems in processes and to improve their
competitiveness.TheformalizationoftheprocessesandtherequirementforISOcertificationforces
thecompanytrainallemployeesresultinginbettertrainedpersonnel,increasingthevalueofoneof
themostimportantresourcesinacompany(Curikov,etal.,1999).
Asaresultofimprovementsduetotheimplementationofthestandardthecustomersatisfactionis
often improved ( (Yahya, et al., 2001); (Bhuiyan, et al., 2005) (Brown, et al., 1995); (Brown, et al.,
1995)).
Quality Efficiency Cost Productivity
Continuous Customer
Flexibility Waste
improvements satisfaction
Delivery
Innovation
precision
Figure30PossibleeffectsofimplementationofISOstandards
ISO14000
Thetraditionalwayoflookingatenvironmentalperformanceinrelationtoindustrialcompetivenessis
thatthereisatradeoffbetweensocialbenefitsofabetterenvironmentandtheeconomicburdenon
thecompanyforimprovedenvironmentalperformance.Buttherearemanyexamplesofcaseswhere
environmentalperformanceandcompetitiveadvantagegoeshandinhandbecauseofnewinnovative
solutions. In many cases bad environmental performance are signs of inefficiencies in the company,
forexamplebadresourceutilization,emissionsandpoorprocesscontrolresultinginwasteandquality
defects. Improving the environmental performance by reducing these inefficiencies does
unhesitatinglyreducecost.Inadditiontocostsavingsmanycompaniescanuseinnovationtodemand
pricepremiumsforgreenproductsandopenupnewmarketsegments(Porter,etal.,1995).
TheimplementationofISO14000canhaveagreatpositiveeffectoftheenvironmentalperformance
as well as overall corporate performance on operational, managerial and competitive level (e.g.
(Rondinelli,etal.,2000);(Kirkpatrick,etal.,1996)(Porter,etal.,1995)).Astudyby(Poksinska,etal.,
2003)showedthatallcompaniesthathadimplementedISO14000wasagreeingthatithadbrought
somebenefitsandoverhalfofthecompaniesstatedthatverysubstantialorsubstantialbenefitswere
achievedfromtheimplementation(Poksinska,etal.,2003).ISO14000hasalarge,positiveimpacton
the environmental performance ( (Melnyk, et al., 2000); (Poksinska, et al., 2003)). ISO 14000
certification also improves the company image (Poksinska, et al., 2003). The implementation of the
standard have great positive effect on the company performance and improve internal procedures
(Poksinska, et al., 2003), reduced waste as for example reduction of material use and lower energy
consumption (Christensen, o.a., 1998), decreased costs and improved quality (Melnyk, et al., 2000)
(see Figure 31). As companies become more environmental friendly they uncover new sources of
improvements.Theresultisthatenhancedenvironmentalresponsibilityresultsinimprovedcorporate
performance(Porter,etal.,1995).
Environmental
performance
Company
Innovation
image
Quality Waste
Figure31PossibleeffectsofimplementationofISO14000
Supplierselection
In this chapter the most popular factors for supplier selection is discussed and thereafter the
conclusionsabouthowtheISOstandardscanbeusedinthesupplierselectionprocessarepresented
followed by a short discussion about the dangers of relying too much on the standards during the
supplierselectionprocess.
Keyfactorsforsupplierselection
Inthesupplierselectionprocesscompaniesuseaselectionofcriteriainordertodeterminewhether
thesupplierlivesuptothestandardornot.Themostimportantsupplierselectionscriteriasisquality
thatconsistentlyisonthetopofthelistofimportantsupplierassessmentcriteria.Deliveryprecisionis
oftenmentionedasanotherimportant.Priceisoftenconsideredtobeanimportantselectioncriteria
(Kannan,etal.,2002)althoughsomestudiesindicatesthatitisbecominglessimportantbecauseof,
amongotherreasons,closersuppliercustomerrelationshipsandlessmultiplesourcing(Simpson,et
al., 2002). Other selection criteria that are considered important are capability, commitment to
continuousimprovements,customerserviceandflexibility(seeFigure32).
(e.g.KannanochTan2002;TanochWisner2000;(WattsochHahn
1993;BrewerochGiunipero1993;Simpson,SiguawochWhite
Quality 2002;Purdy,AstadochSafayeni1993;HirakuboochKublin1998;
Howard1998;Tan,KannanochHandfield1998)
(e.gKannanochTan2002;TanochWisner2000;WattsochHahn
1993;BrewerochGiunipero1993;Simpson,SiguawochWhite
Deliveryprecision 2002;Purdy,AstadochSafayeni1993;HirakuboochKublin1998;
Howard1998;Tan,KannanochHandfield1998)
(e.g.KannanochTan2002;TanochWisner2000;Hirakubooch
Price Kublin1998;Howard1998)
Capability (e.g.KannanochTan2002;TanochWisner2000)
Continuous (e.g.TanochWisner2000;Simpson,SiguawochWhite2002;Purdy,
AstadochSafayeni1993)
improvements
(e.g.TanochWisner2000;WattsochHahn1993;Breweroch
Customerservice Giunipero1993;Tan,KannanochHandfield1998)
Flexibility (e.g.BrewerochGiunipero1993;WattsochHahn1993)
Environment (e.g.Humphreys,WongandChan2003)
Figure32Keyfactorsforsupplierevaluation
TanandWisner(2000)highlightstheimportanceofthesuppliersperformancewithregardstoquality
workandalignsfiveissuesthatareessentialinthisarea:conformancetothespecifications,immediate
response to quality problems taking corrective measures, implementation of quality policies,
documentationandadequateinspectionandtesting.Simpson,SiguawandWhite(2002)agreewithall
the abovementioned issues and add quality and process control as an additional issue. A study by
Purdy, Astand and Safayeni (1993) shows similar results, when the supplier was asked what the
customers emphasized as most important: documentation and communication and participation of
theworkers.
Environmentalperformanceis emerging as a factor to consider in supplier selection (Humphreys,et

al., 2003) but so far it seldom is among the top criterias for supplier selection when these are
presented.
Standardsforsupplierselection
Theuseofstandardsandcertificationsinthesupplierselectionprocessiswidespread(Curkovic,etal.,
1996).InastudybyWisnerandTan(2000)aconsiderablemajorityofthecompaniesstatedthatthey
required their suppliers to be certified either by ISO, the companys own standard or another
recognizedstandard.Certificationisoftenusedasanorderqualifierforthepotentialsuppliers(e.g.
(Curikov, et al., 1999); (Wilson, 1994); (Simpson, et al., 2002) (Corbett, et al., 2004)). The without
competition most popular standard to use for supplier selection is ISO, with 65 percent of the
companiesinthestudybyWisnerandTan(2000)demandingISOcertificationoftheirsuppliers.ISO
14000 is less common in the supplier selection process and few company require their suppliers to
haveISO14000certification(Poksinska,etal.,2003).
The ISO standard can be useful in the suppler evaluation process. The key factors for supplier
evaluation: quality, delivery precision, price, continuous improvements, customer service and
flexibility,andthekeyfactorsforsupplierperformanceregardingtheirqualitywork:conformanceto
specification, immediate response to quality problems, implementation of quality policy,
documentation,participationofworkers,processcontrol,correspondswelltotheeffectsthattheISO
standardscanresultin:quality,deliveryprecision,efficiency,costreduction,productivity,continuous
improvements, flexibility, waste reduction and customer satisfaction and the eight management
principlesthatarethecornerstonesoftheISOstandard(seeFigure33).
Theeight Effectof Effectof Keyfactorsfor Keyfactorsfor

management implementation implementation supplier supplier
principles ofISO9000 ofISO14000 evaluation performance
Leadership Quality Quality Quality Comformance
Involvement Deliveryprecision
Immidiateresponse
Cost Deliveryprecision
Processapproach Cost
Qualitysystem
policies
Continuous Waste Price
Holisticview
improvements
Documentation
Continuous Customer
Environmental Continuous
improvements satisfaction
performance improvements
Participation
Customerfocus Flexibility
Companyimage Customerservice
Processcontrol
Factualapproach Efficiency
Mutuallybeneficial Innovation Flexibility Qualitycontrol

Innovation
relationships
Figure33Comparisonbetweenkeyfactorsforsupplierevaluationandeffectsofimplementationand
certificationofISOstandards
ISOcertificationissuitabletouseasanorderqualifier,asitisusedtoday,sinceitguaranteesthatthe
supplier have a quality or environmental system in place and are working with continuous
improvements and process control etc. Choosing a certified supplier makes in more likely that it is
performing well in many of the areas of interestand is likelymore financially stable. Because ofthe
continuousimprovementprogramsthatareapartofISOcertificationandthebenefitsderivedfrom
organizational learning, a company that have been ISO certified for a long time are expected to
performbetterthananewlycertifiedcompany.
There are dangers with using the ISO standards as a tool for supplier selection. An ISO certification
only ensures that there is asystem in place and does not provide any guarantee on its functionality
(e.g. (Curkovic, et al., 1996); (Peach, 1990)) and ISO certification cannot be used for any deeper
analysis of the suppliers performance since it doesnt specify the degree of improvements in the
different areas. Even though a third party auditor visit the supplier during the certification process
thereismuchinformationthatismissed.Duringtheevaluationvisittheauditorsgenerallydetectsless
thanhalfofthebusinessandmanufacturingproblems(Purdy,etal.,1993).
Another problem that arises as customer demand ISO certification by their customers and ISO
certification becomes more and more popular is that as more suppliers obtain the certification and
achieve the samestandard of qualityISO certification willnot be asufficient way to distinguish one
certifiedsupplierfromanother(Simpson,etal.,2002).
Tacit knowledge transfer, a crucial part of supplier development 133
[12] Tacitknowledgetransfer,a
crucialpartofsupplierdevelopment
As Purchasing Management becomes a
strategic problem for a company,
procuring firms performance has been
significantly influenced by suppliers
capability. Accordingly, supplier
development refers to procuring firms
efforts of improving their suppliers
performance and capabilities. This
chapter introduces three types of
supplier development activities while
putting an emphasis on direct
involvement and, in turn, tacit
knowledge transfer.
Introduction
Thischapterwillstartwithdescribingtheimportanceofsupplierdevelopment,andthendisplayand
discuss the definition of supplier development based on literature study. After that supplier
performancereviewisconductedtocertificatetheprerequisitesofasupplierthatisworthprocuring
firms further efforts of supplier development. The generic supplier development activities are
introducedintheformofthreegroups,anddirectfirminvolvementrepresentstheproactiveactions
compared to incentives and competitive pressure. A case study will be conducted to find out what
happened in practice in terms of the three types of supplier development activities. The direct
involvementwillfurtherbeelaboratedasthreecategoriesandknowledgetransferistheessenceone
outofthethree.Thefocuswillbeplacedonthediffusionoftacitknowledgeinthesupplierfirms.
The purpose of the chapter is to provide the theoretical view of supplier development and its
activities,withtheemphasisontacitknowledgetransfer,andtodefinewhichdevelopmentstrategies
areofthegreatestimportanceforthebuyingfirminpractice,withthesupportofthecasestudy.The
studyareascoveredinthischapterareillustratedinthefigurebelow:
Figure34Chapterstructure
Accordingtotheexplanationsaboveandthechapterstructure(Figure34),thetopicsindarkcollared
boxesaretheessenceofthischapterandwillbeelaboratedmorewhilethelightcollaredboxeswill
onlybementionedbriefly.Trackingthestreamofdarkcollaredboxeswouldmakeiteasiertofollow
thecontentofthischapter.
DefinitionandImportanceof
supplierdevelopment
It is widely reckoned that companies purchase their noncore products and services from external
suppliers, while keep the production of essential parts inhouse (Krause, 1997; Krause, et al., 1998).
However,aspeoplestartedtolookatacompanyscompetitivenessfromamorecomprehensivepoint
of view, the suppliers performance is regarded as of great importance for their customers core
competences.
Intheperspectiveoftotalqualitymanagement,acompanyhastoknowhowtocontrolandmanage
all of its resources and operations. As the providers of raw material, services and other resources,
suppliers themselves are interpreted as a kind of resources as well. All their inputs such as their
product quality, operational processes and the interfaces with procuring firms would lead to direct
impactsontheprocuringfirmsproductqualityandservicelevel.(Humphreys,etal.,2004)
Under the supply chain circumstance a company can be considered either as a supplier or as a
customer,dependingonwhoitdoesbusinesswith.Eachactorplaysitsimportantroleinthewhole
supply chain and affects the overall performance. Briefly speaking, no supply chain can surpass its
weakest point and a laggard supplier wont be able to cooperate well with its customer and will
becometheweakpointofthesupplychain.Thustheprocuringfirmsareobligedtomakeeffortsto
supporttheirsuppliers.(Krause,etal.,1998)
Usually,companiescarryoutsupplierdevelopmentdrivenbytwotypesofmotivations(Krause,etal.,
1998).Thefirstoneisanurgentneedinthefaceoflaggardsuppliers.Inotherwords,itisthereactive
effort when suppliers unsatisfactory performance indeed resulted in negative impacts on procuring
firmsoperations.Incomparisontoreactivemovement,thestrategicsupplierdevelopmentconcerns
procuring firms longterm consideration of increasing suppliers capabilities to meet its future
demand,andinturntoenhanceitsconstantcompetitiveadvantage.Thisstrategicconceptrequires
procuringfirmscontinuousassessmentofsuppliersperformanceandfuturesituation,sothattotake
actionsbeforeproblemsreallyarise.
Regardingthedefinitionofsupplierdevelopment,differentauthorspresentvariouswaystodescribe
it.AselectionofSupplyDevelopmentdefinitionsisdisplayedbelow.
Supplierdevelopmentisdefinedasanysetofactivitiesundertakenbyabuying
firm to identify, measure and improve supplier performance and facilitate the
continuousimprovementoftheoverallvalueofgoodsandservicessuppliedto
thebuyingcompanysbusinessunit.(Krause,etal.,1998)
..supplierdevelopmentisasanyactivitythatabuyerundertakestoimprove
a suppliers performance and/or capabilities to meet the buyers shortterm or
longtermsupplyneeds.(Handfield,etal.,2002)
Supplierdevelopmentisaprocedurebyacompanytohelpimproveitssuppliers
capabilities. More specifically, it may be interpreted as a firms attempt to
transfer (or replicate) some aspects of its inhouse organizational capability
acrossfirmboundaries.(Sako,2003)
According to the studies presented in this chapter, the supplier development generally refers to
effortsmadebyprocuringfirmstoimprovetheirsuppliersperformanceandcapabilities,whichfocus
on the strategies and activities the procuring firms adopt. The starting point will be reviewing
suppliersperformance is order to identify which onesneed tobe improved, and to ensure thatthe
investmentandeffortsareworthwhile.
Suppliersperformancereview
Whenanenterprisehasalreadysetupitssuppliersbaseandhasbeenworkingwiththemforawhile,
there arises an option, either to keep the existing suppliers or to look for an alternative source of
supply.Whenacompanydecidestosearchfornewsuppliers,therecanbeanumberofchallengesand
expensesitwillface,suchascostsforevaluatingnewsuppliers,locationdelimitations,etc.Therefore,
firms often choose to work with present suppliers, whereas evaluating and improving their
performance.(Krause,1997)
Suppliers directly impact, either positively or negatively, or both, many procuring firms competitive
dimensionssuchascost,quality,technology,delivery,flexibilityandprofit.Hence,inordertodevelop
suppliers performance, firms are to evaluate existing relationships and its influence on their
businesses.
Reviewing existing suppliers performance, companies focus on several criteria, depending on their
needs and core businesses. According to Krause (1997), companies emphasis is mainly placed on
itemsquality,itscost,deliverycapabilitiesintermsofleadtimesandflexibility,levelofinnovations,
and product design. Therefore, procuring firms facilitate suppliers performances and capability
improvementsthroughsupplierdevelopment.
Therefore,thesuppliersperformancereviewcanbeseenasabridgebetweensuppliersevaluation
and its further development. Moreover, reviewing a buying firm uses similar criteria to assess its
supplierswiththeones,usedwhenperformingevaluationbeforechoosingthem.Differentcompanies
emphasize different criteria. Thus, after review is performed, purchasing firm sets up its supplier
developmentstrategies.
Genericsupplierdevelopment
activities
In practice, supplier development activities vary significantly and depend on the level of procuring
firms and suppliers involvement in the process. Procuring firms efforts may include only, for
example, informal request for improved performance or extensive efforts with considerable
investments in relationships, trainings, etc. (Krause, 1997) The supplier development literature
describes numerous of development activities with its classification and outcomes. Moreover,
literature consists of a lot of case studies focusing on the automotive industry. Hence, several
examples, regarding buying firms different development activities towards their supplier
performancearepresentedfurther.Additionally,inordertogetapracticalviewonwhatactivitiesto
improvesuppliersperformanceandcapabilitiesaprocuringfirmconsidersandemphasizes,thecase
studyispresented.
Furthermore, while a variety of development activities are described in the literature, its
categorization is also presented. Thus, the grouping methods differ and can contain different
developmentstrategies.AccordingtoKrause,etal.,(2000),thesupplierdevelopmentstrategiescan
becategorizedasinternalizedorexternalizedactivities.Thefirmsinternalizedactivitiesarecriticalto
success, whereas externalized ones are not related to their core capabilities. Therefore, the
internalized group of activities requires firms direct involvement and contains such strategies as
supplier review, trainings, reward programs, etc. Contrarily, the following development strategies
representexternalizedactivities:competitivepressure,supplierassessmentandsupplierincentives.
Thus, there are other ways of grouping described by literature, however, the way how to classify
development activities into several approaches, described by Krause (1997), is chosen as a robust
framework, because it presents a clear segmentation and can include all activities. Thus, to assist in
summarizing possible development activities, which are brought up from different literature
resources, the framework is followed. The structure of the framework combines three approaches:
directfirminvolvement,incentivesandenforcedcompetition;whicharedescribedfurther.
Directfirminvolvement
Having this kind of relationships, a buying firm is actively involved in its suppliers development
processes, which entail investments and affords in order to achieve improvements. Therefore, a
companyanditssupplierscreateparticulardevelopmentactivitieswhicharefurtherimplementedfor
suppliers performance improvement. Moreover, those activities are characterized by interaction
betweenpartiesinvolvedandselected,dependingontheexpectedresultsandavailableresources.
The direct firms involvement is emphasized by the literature because of its specific relationships
betweenparties,includinginvestmentsandriskstothebuyingfirm.Thus,formalsupplierevaluationis
oneofthisgroupsactivities,performedbythepurchasingcompanyinordertoassessitssuppliers.
(Krause,etal.,1998)Moreover,supplierevaluationcanhelptoidentifywheresupplierdevelopment
activitiesshouldbeconcentratedandcanprovideabenchmarktoreviewtheoutcomesderivedfrom
supplier development strategies. In addition, providing supplier with feedback about results of its
evaluationisanotherdevelopmentactivityfrequentlyusedbybuyingfirms,guidingasuppliertohow
toimprove(Krause,1997).
Furthermore, supplier site visit by purchasing firm premises to help supplier to improve its
performance,whenviewingtheprocessandestimatingitsadvantagesanddisadvantages.(Krause,et
al., 1998) Moreover, informal evaluation is another activity which can be used to improve supplier
performance, when, for example, inviting supplier personnel to the companys site to increase its
awareness of how its product is used. In order to motivate supplier, a firm can consider different
awardprograms,whichproviderecognitionforoutstandingachievements(Krause,1997).
In addition, use of supplier certification programs in order to certify suppliers quality, making
incoming inspection unnecessary is implemented by many buying firms. Moreover, to improve its
performance,asuppliercanbequestionedinverbalorwrittenforms.Anotherdevelopmentactivity
emphasizedbyliteraturedescribes importance of the top managementinvolvement. (Krause,et al.,
1998)
Finally, the purchasing firm can contribute to its supplier development by providing trainings and
education. Thus, more know ledged suppliers personnel can reconsider its way of thinking and
attitudetowardssupplyingproductsanditsperformance(Krause,1997).
Summarized, the direct firm involvement activities include formal supplier evaluation, feedbacks,
suppliersitevisit,invitingsupplierpersonnel,certificationprograms,awardprograms,supplierverbal
orwrittenrequest,topmanagementinvolvement,trainingsandeducationprograms.
Incentives
Inthistypeofrelationships,asupplierandaprocuringfirmagreeuponparticularcurrentandfuture
benefits, which they both expect from being involved in these relationships. Hence, a buying firm
commitsonlyifasupplierimproves,motivatingsuppliertoimproveperformance.
In order to encourage suppliers to develop, the firm may give such promises as to purchase high
volumesfromparticularsuppliers;prioritizethem,whenothersuppliersprovidewiththesamekindof
the product; consider them for future business activities, etc. However, it is essential to emphasize
that,whilehavingthiskindofrelationships,apurchasingfirmiscommittedtogiveparticularbenefits
tosuppliersonlyiftheyimprovetheirperformance(Krause,1997).
Enforcedcompetition
Enforcedcompetitionmaybedescribedasaparticularkindofrelationship,whichdoesntinvolveany
firmscommitment.Parties,buyingfirmandsuppliers,arehavingsocalledArmslengthrelationships
where no trust, commitment, support or risk sharing exists and is needed. Therefore, the main
advantageofsuchrelationshipsistomotivatesuppliersthroughthecompetition(Krause,1997).
To benefit from such competition, a buying firm may choose several suppliers and play them off in
ordertoreducepriceforthepurchasedproducts.Itisimportanttomention,thattheuseofmarket
competition is mainly applicable when purchasing commodities and the price is a target criterion.
However,thefocusonthepricereductioncaninfluencethequalityissuenegatively(Krause,1997).
Tosummarize,rightsuppliersaretobechosen,whichwillbeinvolvedinthecompetition,inorderto
avoid serious quality defects. There is no commitment with those suppliers and a purchasing firm is
not directly involved in the suppliers afford to improve its performance. Moreover, in this type of
relationships, when a buying firm is not satisfied with the supplier, regarding its price, location,
behaviour,itmayswitchthesupplier.Thus,thesupplierimprovesorfailsitsperformanceonitsown.
Casestudy:Volvo3p(1)
The purpose of the case study is to determine whether the development activities,
describedintheliteratureresources,areusedbythebuyingfirmsinpracticeandwhich
of those strategies are of the most importance. Therefore, previously described
framework, which provides with development activities categorization, is followed in
ordertocomparethetheoreticalandrealimprovementsbythebuyingfirmtowardsits
suppliers.
Method
In order to collect data, the interviewing tool was used. An interview can be generally
described as a conversation between two or more people (the interviewer and the
interviewee)where questions are asked by the interviewer to obtain information from
the interviewee. Typically, interviewing methods contain interviews with opened or
closed questions. Opened questions provide with wide, detailed and more qualitative
answers,contrarilytoclosedoneswheresuchanswersasYesandNoareexpected
(Rubin,etal.,2005).
To be able to get better result from the interview, the socalled qualitative interview
method can be used. Thus, qualitative interview is a conversation in which the
researcher guides a conversational partner in an extended discussion. The researcher
elicitsdepthand details aboutthe research topic by following up on answers given by
the interviewee during the discussion. Therefore, the qualitative interview contains a
responsiveness issue, where a researcher is responding and then asking further
questionsratherthanrelyingonpredeterminedquestionsonly(Rubin,etal.,2005).
Hence,thequalitativeinterviewingapproachwasdecidedtobeusedforthecasestudy.
Thequestionswerepreparedinadvanceandstructuredintheopenedform,following
thedevelopmentactivitiesframework,inordertoencouragetheconversationandgeta
deeperunderstandingoftheintervieweesopinion.Moreover,theanswersprovidewith
examplesanddescriptionsofintervieweesexperiences.Additionally,thecompanywas
asked to indicate to which extent it is engaged in the various supplier development
activities,whicharegeneratedfromtheliteraturestudy.Thescale15wasused,where1
rankingwasgivenwhenanactivityistheleastimportant,whereasthoseactivitieswhich
arethemostessentialforthecompanywererankedwith5.
Limitations
The interview was performed with one company Volvo 3P , and the answers were
generated from one interviewed employee, who has been working as a purchasing
project manager for approximately ten years, and has proper knowledge and
experience. Moreover, all types of suppliers were considered when answering the
questionsandgivingcommentsbytherespondent.
Therespondent
TheintervieweeforthisstudywastheVolvo3P(V3P)company,andparticularlyPeter
Thomasson,whoholdsatitleoftheProjectSQAatVolvo3PInternationalPurchasing.As
for the companys background, Volvo 3P companys core businesses are product
planning, product development and purchasing for such truck companies as Volvo
Trucks,Macktrucks,NissanDieselandRenaultTrucks.
Globally, Volvo 3P has around 3000 employees and a number of offices which are
located in Japan, Sweden, France, the USA, Brazil, India, China and Australia. Talking
aboutsupplierbase,thecompanyisworkingwith1800suppliersworldwide.Moreover,
thecompanyisactivelydoingitsbusinesseswithabout500ofthosesuppliers.
Results
Therespondentwasprovidedwiththetheoreticalframeworkanditsactivities,whichis
describedinthetheoreticalpartofthechapter.Moreover,theinterviewformwassent
to the interviewee one day in advance, in order to get more deep and descriptive
answers. Therefore, the results from the interview with the development activities
rankingsaresummarizedandpresentedbelowinTable19.
Hence, formal supplier evaluation/reviewing is ranked with 5, illustrating the great
importance for V3P. According to the comments, given by Peter Thomasson, the
companyisfollowingupitssuppliersperformances,whilstmonthlyupdatingsuppliers
scorecardsinthespecialcomputersystem.Everysupplierhashisownscorecardwhich
includes such criteria as suppliers sales status, duality performance, delivery position,
etc.Therefore,everysupplierisbeingmonitored;however,thoseoneswhodontfulfil
thecriteriaarebeingreviewedmoreoften.
As for giving feedbacks, after reviewing suppliers performance, V3P assessed this
activityasavitalandnecessaryone.Thecompanyhasanaccesstoitssuppliersportals.
Thus, the feedback is placed on the portal or, in case when particular suppliers dont
providewithsatisfactoryevaluationresults,theyarecontactedpersonally.
ThenextV3Psperformeddevelopmentactivityisthesupplierssitevisit,whichisoneof
thepriorityones.Thecompanyisactivelypracticingtheirsupplierssitevisits,however,it
istobeemphasizedthatthecompanyvisitssuppliersonlyiftheyareinvolvedinrecently
developedproduct,participateincurrentprojectorifsuppliersarehavingproblems.
Furthermore, in order to be the companys business partner, suppliers are obliged to

have special certificates.The required certificates are ISO TS 16949 and ISO 14001 (the
environmental certificate). In addition, to reward companys suppliers, the award
programs exist and implemented by V3P for premium suppliers, which are selected
according to the companys requirements and future companys focuses. Volvo 3P
organizessuchactivityannually.Thus,forexample,in2006,8suppliersoutof50were
awarded.
Education and trainings were not emphasized by Volvo 3P as activities which are
practiced in order to develop its suppliers. However, in the past, the trainings were
organizedbythecompanybutnotanylonger.Therefore,toeducatetheirsuppliers,the
company doesnt use any official methods, but provides them with the updated
informationoncommonbusinessareathroughpresentationsandmeetings.
Inaddition,V3Pisinvitingsupplierspersonneltothecompanyandorganizesasocalled
SuppliersDay.Todrawanexamplefrom2005,onehundredsupplierswereinvitedto
the companys office in Turkey, and were provided with a number of companys
presentations.However,thisactivityisnotofagreatimportanceforthecompany,when
comparing, for example, with such activities as formal supplier review, feedbacks,
certificateprograms,etc.
Talkingaboutthoseactivities,whichincludeverbalandwrittenrequests,itisorganized
systematically by Volvo 3P. In order to make verbal request, the company is delivering
presentations and organizing meetings. The written request is performed via internet,
withthehelpofElectronicdataInterchange(EDI)tools.
In addition to all before described activities, V3P emphasized top management
involvement as another essential activity, which is in focus for the company. Officially,
there is no suppliers segmentation into A, B and C groups or using other ways to
segment them. However, the premium suppliers are of priority for the company,
consideringitscontributiontotheV3Pturnover.Thus,topmanagersorganizemeeting
withthepremiumsuppliersandactivelyparticipateandmonitoritsrelationships.
Movingtothesecondgroupofthedevelopmentactivitiesframeworkincentivesthe
company is considering both promise of current benefits and promise of future
benefits as essential strategies. However, it is interesting to mention that volume
criterion is the main incentive for V3P in order to become a premium supplier. The
providingofnewmarketsforsuppliers,whenthecompanyisexpanding,isanexample
onhowV3Pgivesfuturebenefitstoitssuppliers.
Finally, the company was questioned whether it uses enforced competition towards
suppliers or not. Hence, typically, V3P has at least two alternative suppliers, which are
competingforthecompanysvolume.However,thecostisnottheonlyconsiderationof
the company, but also such criteria as quality, logistics conditions and product
developmentcapabilitiesareassessed.Inordertochoosethemostsuitablesupplier,the
firmneedstocompromiseandweighsallsuppliersstrengthandweaknesses,according
tothecompanysfocuses.
Developmentactivities Rank(15)
Directfirmsinvolvement
Officialsupplierevaluation/review 5
Feedbacks 5
Suppliersitevisits 5
Certificationprograms 5
Topmanagersinvolvement 5
Awardprograms 3
Trainings 0
Education 0
Invitingsupplierpersonnel 3
Verbalorwrittenrequest 4
Incentives
Promiseofcurrentbenefits 5
Promiseoffuturebenefits 5
Enforcedcompetition
Playoffseveralsuppliers 5
Table19Supplier'sdevelopmentactivities

Conclusions
Theresults of thequalitative interviewwith the purchasing managerPeter Thomasson

from V3P illustrate that the chosen theoretical framework was easily followed by the
respondent and contained all development activities, which were considered by the
company.
It can be summarized that the priority activities used by the company to develop its
suppliers are official supplier evaluation/review, feedbacks, supplier site visits,
certification programs, top management involvement, promising of current and future

benefits and enforced competition. In addition, top management involvement, award
programs and verbal and written requests are of a secondary importance for the
company.Finally,V3Pdoesntofficiallyorganizeanytrainingsoreducationalprograms,
referringtoitshighcost,howeveritwasconsideredinpast,butnotanylonger.
Tacitknowledgetransfer
As mentioned before, the supplier development activities are characterized into three groups:
incentive,directinvolvementandenforcedcompetition.Theincentivescreatedforthesuppliersself
improvementwouldonlyprovidelimitedhelptosolvethesubstantialproblemswhensuppliersgetno
accesstothosecapabilitiestheylackfor.Inotherwords,incentivesarenecessarybutnotsufficient
for supplier development (Sako, 2003).Besides, the competitivepressures and reward systems may
giverisetosomesideeffectssuchasnegativeimpactsonthebuyersellerrelationship.Ontheother
hand, direct firm involvement offers direct support to improve supplier capabilities or to enable
suppliers new possibilities to either fulfil the commitments or meet procuring firms future
competitivedemand.
The direct firm involvement generally consists of several different ways (Modi, et al., 2007). The
simplest way is to invest capital and equipment into suppliers operations while the second one
suggestspartiallyownershipofsuppliersfirms(Monczka,etal.,1993;Krause,etal.,2000;Dyer,etal.).
Bothmethodsimplyhighinterventionintosupplierfirmsfinancialandoperationaldecisions,sincethe
procuring firms have invested a considerable amount of money. The third way refers to knowledge
transferwhichcallsfortheinputofprocuringfirmshumanandorganizationalresources.
Basically,knowledge is distinguished intoexplicit knowledge and tacit knowledgedepending on the

possibility to structure and codify the knowledge (Herrgard, 2000). Regarding this principle, explicit
knowledge is the information and capabilities that are easily recognized, codified, replicated and
shared (Duanmu, et al., 2007; Modi, et al., 2007; Kogut, et al., 1996). In this sense, the transfer of
explicitknowledgeisamatterofinformationsharingwhichhasbeendiscussedinpreviouschapter.
Tacitknowledgeisperceivedastheantithesisoftacitknowledge,whichisdifficulttobearticulated
andcodified(Nonaka,1991;Argote,etal.,2000;Kogut,etal.,1992;Foos,etal.,2006).Andthemost
famous statement about tacit knowledge: We know more than we can tell (Polanyi, 1966). This
knowledgeusuallyresideswithinindividualsandisquitesubjectiveinsomecases(Grant,1996;Lord,
etal.,2002;Nonaka,etal.,2000).
When looking at those studies of knowledge transfer, a trend can be observed that there is an
increasinginterestindealingwithtacitknowledge(Augier,etal.,1999;Herrgard,2000).Butcompared
to explicit knowledge, this field is still barely explored (Zack, 1999; Herrgard, 2000). From the
knowledgemanagementpointofview,thetransferactivitiescanbecarriedouteitherattheinterfirm
levelorattheintrafirmlevel(Duanmu,etal.,2007).Therefore,inthesupplierdevelopmentcontext,
knowledgetransferactivitiesrefertotheimplementationofactivitiesattheinterfirmlevel(Modi,et
al.,2007).Andinthissection,thediscussionisabouttacitknowledgetransferacrossfirmsboundary
asanimportantwayofperformingsupplierdevelopment.
Thecharacteristicsandessential
factorsoftacitknowledgetransfer
Many literatures indicate that tacit knowledge relies on individuals as the repository in the form of
skills, knowhow, and experience accumulated through practical operations etc. (Modi, et al., 2007;
Grant,1996).Peoplewhomasterthetacitknowledgemaynotknowhowtodescribeandformalizeit.
Meanwhile people who want to acquire the tacit knowledge cannot obtain it merely by reading
instructions.Theaccesstotacitknowledgeisthroughapplicationandpracticewiththosepeoplewho
already comprehend it. Accordingly, tacit knowledge transfer is a process of teaching and learning
whichneedparticipationofbilateralfirms.
Thisteachingandlearningprocessconcernsintensivecommunicationsanddirectinteractionamong
thepersonnelofprocuringfirmandtheirsuppliers(Bresman,etal.,1999;Modi,etal.,2007;Nonaka,
et al., 1995). Consequently, tacit knowledge transfer requires intensive time, money, personnel and
trustinvestment(Szulanski,2002;Modi,etal.,2007).Thisintrinsicfeatureoftacitknowledgemakes
the transfer work more based on longterm and highinvolvement partnership between procuring
firmsandsuppliershenceenablesthecommunicationandinteraction(Handfield,etal.,2002).Thisis
thepreconditionofperformingtacitknowledgetransfer.
Accordingto FoosT.etal.,(2006),inmanycases,ratherthanbeingregardedasanindividual issue,

tacit knowledge transfer is just attached to projects. It is not even addressed during the project
process, but just occurred in an informal and as needed manner. Moreover, being a part of project
resultsinanotherproblem.Peopleindifferentlevelsofanorganizationaredrivenbydistinctivegoals
andexpectation.Seniormanagersalwaysgiveaprioritytotheorganizationslongtermstrategywhile
projectmanagersonlywanttofocusonpresentproject.
In this case, breaking conventional routines i.e. taking tacit knowledge transfer as an independent
project is recommended. A project team regarding knowledge transfer between procuring firm and
suppliers should be established (Foos, et al., 2006). This is quite timeconsuming and as mentioned
before, should be based on trustful relationship. Besides, an independent supplier development
projectalsobringsforthproblems.Sako(2003)statedthisproblemastheinterdependenceamonga
firms supplier development process and other processes in the organization. Therefore, a tradeoff
betweenthosetwoextremesarehastobeseekcarefully.
When implementing tacit knowledge transfer beyond the company boundary, the goals, involved
resources,actors,activities,processeshavetobeclarified.Thecriteriaforreviewingandassessingthe
transferperformanceissaidtobeneeded.However,theresfewtheoryabouthowtobuildsuchaset
ofcriteria,sinceitwouldbebasedverymuchonthebothcompaniesagreementandperceptionof
tacitknowledge.
As described by Sako (2003), knowledge transfer also gives rise to organization and governance
problems. The input of procuring firms will intervene suppliers operations and decisions, thus the
notion of the supplier company as an autonomous unit of organizational control is potentially
undermined.Inthissense,arightorganizationalstructurewhichhavethepositiveinfluenceontacit
knowledgetransferisneeded(Lord,etal.,2002).
So far, theres no systematic method in implementing tacit knowledge transfer which is widely
exploited(Szulanski,2002).Mostliteratureconducttheirstudyintheformofanalyzingdataacquiring
form company survey and giving recommendations that mainly used by companies who are
consideredasbeingsuccessfulintermsofsupplierdevelopment.Butstill,acompanyshouldbuildits
ownknowledgetransferprocessbasedonitscultureandpracticaldemand.
Tacitknowledgetransferactivities
The methods of tacit knowledge transfer itself can also be conceived as a tacit knowledge which is
difficult to be replicated (Sako, 2003). A transfer process is hard to be developed only based on
theories without real problem analysis, practice and application. Besides, the transfer activities are
variousregardingdifferentcompaniesandrelationships.Inmostcases, thetacitknowledgetransfer
activities that companies engaged in include many visits, training and meetings etc. All those
activitiescanbecategorizedintopassive,proactiveandcollaborativeasshowninFigure35.
Collaborative
Proactive Passive
Tacit
Knowledge
Tansfer
Activities

Figure35Categoryoftacitknowledgetransferactivities
Someprocuringfirmssendtheirpersonneltosuppliersitestoperformimprovingactivities(Modi,et
al., 2007).For instance, intheautomobileindustry,automakersmaysendtheirownengineerstothe
suppliers shop floor to help solve a problem with a specific component in order to meet the product
launch date (Sako, 2003). This onsite assist can be perceived as passive tacit knowledge transfer
effortsincetheknowledgestillresidesinprocuringfirm.Inotherwords,thesuppliersperformance
maybeimprovedwhileitscapabilitystillremainsunchanged.
Proactive activities refer to the genuine knowledge transfer (i.e. Tacit knowledge is really
transferredfromprocuring firmsindividualstosuppliersindividuals).Toachievethis,theprocuring
firmsusuallyprovidetrainingcourses,seminarsandsitevisitsforsuppliersemployeesintechniques,
operation process, and problem solving etc (Sako, 2003; Modi, et al., 2007). Compared to passive
activities,apartfrompersonneldevotiontheprocuringcompanyhastospendmoretimeandmoney
onworkingouttheproperwaytocarryoutthoseactivities.
Collaborative activities are more about involving suppliers into procuring firms production or
operations, increasing suppliers awareness the companys products and in turn always keeping
suppliers as the same quality level as the procuring firm (Sako, 2003). The early involvement of
supplierrepresentsatypicalcollaborativeefforttodiffusetacitknowledgeintosuppliers,sothatto
achievecostreductionandqualityimprovementbytheeffortsofbothsides,whichmeansthesupplier
developmenthasbeenachievedfrombeginningandtheavoidanceoffutureproblems.
Figure36Selectionoftacitknowledgetransferactivities
Whetherchoosepassiveactivitiesorproactiveonesorcollaborativewaystotransfertacitknowledge
dependsonthecompanysperceptionofsupplierdevelopmentandrealisticdemand.Figure36shows
an example of selecting tacit knowledge transfer activities with two dimensions which are the
closenessofrelationshipandnumberofsuppliers.Forinstance,thecollaborativeactivitiesshouldbe
undertaken with intensive efforts of bilateral firms. Apart from labors, capital, time and technique
investment, collaborative will lead to organization and governance problems as mentioned before.
The procuring firms and suppliers have to agree on a shared vision of value and routines (Li, 2005).
Consequently,allthefeaturesindicateaconsiderablydeeprelationshipwithsuppliers,whichexplain
whycollaborativeactivitiesrequiretheclosestpartnershipamongallthethreetypesofactivities.And
thoseintensiveeffortsalsolimitthenumberofsupplierswithwhichtheprocuringfirmcancarryout
thecollaborativeactivities.Forinstance,somecompaniesonlysharetheirtacitknowledgewithinner
corewhichrangesfrom25companiesatNissanand52atToyota,upto63atHonda(Sako,2003).
Furthermore, passive methods are preferable when the procuring company concerns more about
reserving theirknowledgeas a secretand preventing leakageto competitors orwhen the teaching
learning process is extremely complicated and timeconsuming. Proactive ones are adopted by
companies with the willingness to share its knowledge. The training course is especially practical
whenmanysuppliersneedtobeimprovedsimultaneously.Collaborativeeffortsaremostefficientin
terms of strategic improvement of suppliers capability i.e. enable the suppliers possibility to meet
futuredemand.
Besides, Sako (2003) introduced another way to classify tacit knowledge transfer activities. It is a
model called organizational framework with two dimensions can be helpful in categorizing
organizational capability (i.e. tacit knowledge), hence in identifying proper methods to develop
suppliers. The first dimension is the type of capability (i.e. the procuring firms ability to develop
suppliers)whichconsistsofmaintenancecapability,improvementcapabilityandevolutioncapability
(Fujimoto,2002;Fujimoto,1997).
1. Maintenancecapability:thecapabilitytomaintainsuppliersperformancetoalwaysmeetthe
currentdemandconstantly;
2. Improvement capability : the capability to improve suppliers current performance to meet
futuredemand;
3. Evolutioncapability:thecapabilityforcapabilitybuilding.
The second dimension is the scope of development activity. The knowledge transfer or other
developmentactivitiescanbeconductedforasinglecomponentproductionline,orwithinafactory,
or beyond production (such as early involvement of suppliers), or in a companywide (Sako, 2003).
With the help of this framework, the procuring firms can identify, categorize and select all those
supplierdevelopmentactivitiesregardingtheirpracticaldemandandlimitations.Andthesameactivity
suchasonsitevisit,personneltrainingetc.canalsobeperformedindifferentscopeandaccordingto
differentcapabilities.
Another important point is, Knowledge transfer is inevitably connected with other supplier
development methods and factors. For instance, incentives have significant impact on the
effectiveness of knowledge transfer (Gupta, et al., 2000; Lord, et al., 2002). In Japan, suppliers
actionsofacquiringcapabilityfromprocuringfirmsarestimulatedbyincentives(Sako,2003).Modi,et
al., (2007) also stated that the three supplier development activities should be linked together with
collaborativecommunicationandbilateraltopmanagementinvolvement.
In conclusion, communication, trust and some other soft side factors together with transfer
methods decide whether the procuring firms succeeded in tacit knowledge transfer. In this sense,
assessing if one specific transfer method is useful would be an intricate process. However, these
factorsshouldbealwayskeptinmindwhencarryingouttacitknowledgetransferi.e.mutualtrustand
intensiveefforts whichareconstructedonlongtermandhighinvolvementpartnership.
Conclusion
The chapter aimed at illustrating supplier development importance, its various activities and tacit
knowledge transfer, which was emphasized by numerous of literature resources and case studies.
Therefore, the importance of supplier development was analyzed in the perspective of total quality
management and supply chain management. The first one focus on the impact of supplier
developmentonprocuringcompanyitself,whistthelatteroneconcernstheoverallperformanceof
the supply chain. Then based on the scope of this chapter, the supplier development was simply
definedaseffortsmadebyprocuringfirmstoimprovetheirsuppliersperformanceandcapabilities.
In the following section, different ways how to group development activities was presented.
However,theframeworkwhichcontainssegmentationintodirectfirmsinvolvement,incentivesand
enforcedcompetitionwaschosen.Inadditional,inordertoprovidewiththepracticalexample,the
case study was presented. The results of the case study show that the interviewed company was
emphasizing the following supplier development activities: official supplier evaluation/review,
feedbacks,suppliersitevisits,andcertificationprograms,topmanagementinvolvement,promisingof
currentandfuturebenefitsandenforcedcompetition.
Out of the three supplier development methods, tacit knowledge transfer which belongs to direct
involvementwaselaboratedinthefollowingsection.Inthecharacteristicsoftacitknowledgetransfer
part,theimplicitnatureoftacitknowledgewhichleadstothebarrierofknowledgetransferwasfirst
discussed.Thepreconditionoftacitknowledgetransferwasthenpointedoutaslongtermandhigh
involvement relationship. After that, the tradeoff between attaching tacit knowledge transfer to
other projects and having totally independent supplier development process was brought up. The
section also touched upon the organization and governance problems resides within knowledge
transferactivities.
Aclassificationoftacitknowledgetransferactivitieswasintroducedinthenextsection,whichdivide
the activities into three groups: passive, proactive, collaborative. Some realistic activities that were
already adopted by companies were exemplified to support each type of activities. Additionally,
another model called organizational framework which was described in the literature was also
mentionedasanoptionalmethodtocategorizetacitknowledgetransfer.


Supplier development with quality focus 151
[13] Supplierdevelopmentwith
qualityfocus
This chapter deals with supplier
development with quality focus and
also shortly touches upon supplier
quality development in developing
countries. The chapter will present a
definition of supplier development and
a conceptual description of quality. This
is followed by the main study which
consists of a description and analysis of
different activities for supplier quality
development. The chapter also includes
a case study from Volvo 3P related to
the topic.
Purpose
The quality of a product is not only depending on the buying manufacturers own operations since
outsourcing of manufacturing operations and production components have increased. This means
thattheshareoftheendproductswhichconsistofsuppliedcomponentshasincreasedsignificantly.
Ontheotherhand,therestillexistpossibleimprovementsthatthebuyingcompanycandoandnew
fieldsregardingsupplierqualitydevelopmentcanbefoundinliterature.
Thepurposeofthischapteristodescribethestateoftheartofsupplierqualitydevelopmentandthe
content is based bothon literature andbusiness practice. It aims togive a bilateral view ofsupplier
quality development activities and programs. Furthermore the chapter aims to make a modest
contributiontobothliteratureandtobusinesspractices.
Introduction
As network approaches become more commonly practiced within the business world, especially in
Europe, it becomes more important for companies, especially big companies with complex supply
chain systems, to focus on their supplier base. Manufacturing companies cannot be considered as
independent actors on the market anymore since their production output is heavily dependent on
theirsuppliersperformances(Waller,2004).Manufacturingorganizationsmust,therefore,focustheir
attention on their suppliers performances to be able to secure that their end customers
requirementswillbemetandresultintotalcustomersatisfaction.(Cormican,etal.,2007)
Notallcompanieswanttohandleordealwiththeirsupplierstoimprovethem.Thiscanbeexplained
bydifferentreasons,justtonameafew,thecompanycanlackofinterestregardingthis,sincethey
might feel it is: unnecessary especially with suppliers which is located close geographically, and with
similartechnicaldevelopmentlevel,unrealisticreasoningthatitwouldbealmostimpossibletodevelop
the supplier by externally efforts like pushing them to reach progress, intimidating being afraid of
informationsharingforcompetitivereasonsortheymightnothavetimetohandletheseissuesbeing
alreadyoccupiedwithmanagingtheirownbusinesses.
Still, the reasons above do not lessen the importance of supplier development. As many business
organizations see the need of diversifying their supplier base towards developing and lower cost
countries, supplier development becomes an inevitable requirement for them to run their business.
Suppliersindevelopingcountriesmightbecheaperandmoreflexiblethantheirwesterncompetitors
but it is clear that many of them are lacking in competitiveness when it comes to modern business
requirements and in many cases also quality. Therefore, supplier development is an interesting and
needfultopictostudy.
In other words this chapter will focus on supplier development, with some references on supplier
relationship development. The chapter will also focus on supplier relations and development with
suppliers located in low cost countries on other geographic markets. The basic reasoning to the
chaptersfocusonsupplierslocatedintheselowcostcountriesisthatitoftenismoredifficulttohave
really proper relationships with suppliers from far geographies and with different business culture
thanthebuyingfirm.
Thischapterwillalsoputmainfocusonsupplierqualitydevelopmentandalsowillspecificallytouch
upondevelopmentofnonwesternsuppliers.Thecasestudyintheendofthischapterwillbebased
on an interview with a business professional from Volvo 3Ps Business Unit. Findings from the case
study will later in this chapter be analyzed based on theory and literature. The analysis will be
presentedinthesummaryandconclusionpartofthischapter.
Conceptofsupplierdevelopment
anditsqualityimplications
This part will define some terms and concepts useful for this chapter. In other words this part will
providetheframeworkofknowledgethatthereaderneedstohavetofullyunderstandthepurpose
and the content of this study. Hahn et al (1990) defines supplier development as any systematic
organizationalefforttocreateandmaintainanetworkofcompetentsuppliers.Following,Hahn etal
(1990)brokedownthisdefinitionintotwoperspectives.Onewascreationofnewsourcesofsupply
whentherearenoadequatesupplierstomeetfirmsrequirementsandtheotheronewaslongterm
cooperation effort between buying firm and its suppliers to upgrade the suppliers technical, quality,
delivery,andcostcapabilitiesandtofosterongoingimprovements.(Hahn,etal.,1990)
Quality management is a very important field in business environment and it has received much
attentionfrombothliteratureandbusinesspractices.Manydifferentmethodstoimprovequalityhave
been implemented by business organizations such as TQM, FMEA (Failure Modes and Effects
Analysis), Six Sigma, Kaizen etc. Furthermore, several international organizations such as ISO, has
developed quality standards for companies and different businesses. However, as it has been
traditionallyaninternalfocusitdidnotreceivemuchattentioninthesupplychainfielduntilrecently.
So,sincethischapterfocusesonquality,adescriptionofsomeknownqualitydimensionscouldhelp
togiveabetterunderstandingofthistopic.Forker(1997)presentsthequalitydimensionas:
i. Performance:theproduct'sprimaryoperatingcharacteristics
ii. Features:attributesthatsupplementtheproduct'sprimaryoperatingcharacteristics
iii. Reliability:theprobabilityofaproductfailingwithinaspecifiedtimeperiod
iv. Conformance: the extent to which a product's design and operating characteristics meet
predeterminedstandards
v. Durability:theamountofuseaproductoffersaconsumerbeforetheproductdeteriorates
vi. Serviceability: how fast, how easily, and with what degree of courtesy and competence
repairsareperformed
vii. Aesthetics:howaproductappealstothefivesenses
viii. Perceivedquality:reputation,image,orotherinferencesregardingtheattributesofaproduct
Asseenabovequalityhasaverybroadbaseofdimensionsandqualityisrelevantinmanyaspectsand
in every level of quality the suppliers deliveries are important factors regarding the quality of the
buyingfirmsoutput.Moreover,ascanbeseeninthedefinitionofsupplierdevelopment,qualityisone
ofthemostimportantandinevitableaspectsofsupplierdevelopment.Itwouldnotbewrongstating
thatqualitydevelopmentisaverybasicandinitiallevelofsupplierdevelopment.Withoutensuringthe
quality level of a suppliers delivery of goods or services supplier development efforts will not be
successful and activities like involving suppliers in product development will be problematic. Quality
has also been proven to correlate with productivity and an increased quality loads to an increased
productivity (Gitlow, et al., 1983). All these things together are the main reasoning for presenting
supplierqualitydevelopmentphasesandactivitiesinthenextpartofthischapter.
Supplierqualitydevelopment
phasesandactivities
Figure 37 below is taken from Trent et al (1999) and will be the base literature source for this part.
Other complementary or differing perspectives will also be presented, but just briefly. The findings
mentioned in this part are based on a broad survey, which is based on questions and answers from
executive managers working at different types of companies on the American market. Figure 37
presents a hierarchy of activities that often supports worldclass supplier quality performance and
which also helps to ensure the achievement of current and future customer quality expectations
(Trent,etal.,1999).Thehierarchyofsuggestedactivitiesisasfollows:
1. Optimize supplier base to a manageable level: Surely, pursuing value added activities with 250
suppliers would be easier than 4000 suppliers. Eliminating incompetent or infeasible suppliers
shouldbethefirststeptotakeinthisinitialaction.(Cormican,etal.,2007)
2. Measure supplier quality performance: Continuous, dynamic and in some cases even mutual
measurement of suppliers quality performance is vital. It can be done in align with other
measurementandevaluationsystemssuchas,overallsupplierevaluation.a(Chin,etal.,2006),
(Cormican,etal.,2007)
3. Establish aggressive supplier improvement targets: This activity is related to the competition
between the buying firm and its suppliers. This method is based on that the suppliers need to
increase their quality performance level faster than their competitors; otherwise they will lose
theirbusiness. It is a demanding approach, from the suppliers point of view, but if the method
canbemanagedactivelygreatpositivebenefitscanbegained.
4. Rewardsuperiorsupplierperformanceandimprovement:Rewardisalwaysatemptingofferto
motivate suppliers to improve their quality levels. One example of rewards is to share the
benefits,resultingfromsupplierinitiatedimprovements,byoffertheimprovedsupplieragreater
shareofabuyerstotalvolume.
5. Certifysupplierprocessesandmethods:Certificationhelpstoassurethatthesuppliersprocesses
and operating methods are in control. That often limits the need for inspections of incoming
suppliermaterialandcomponents.Itshouldbeachallengingtogetacertificateandthedecision
aboutapprovingasuppliershouldbetakenmutuallybycrossfunctionalteamsandperhapswith
helpofexternalconsultancy.Whenthesupplierisapprovedandhasreceivedthecertificatethe
buyershould remove unnecessary quality securing processes, such as eliminating inspections of
incomingmaterialandcomponents.
6. Commit the necessary resources to supplier development: This next step comes with more
challenges and more resource needs, compared with the earlier steps mentioned in this part of
the chapter. This step should only be performed after a rationalization process of the supplier
base(seestep1).Nowadays,manycompanieshasrealizedtheimportanceofthisissueandbegun
todevotemoreresourcestoimprovesupplierqualityperformance.Forinstance,Hondacommits
to supplier quality development 40 fulltime engineers in the purchasing department, these
engineers work with improving the suppliers productivity and quality. The suppliers receive
technicalsupportinformofaHondaqualityupprogram,whichaimistoworkdirectlyverses
theexecutivemanagementteamatapoorlyperformingsuppliersproductionsite.
7. Involvesuppliersearlyinproductandprocessdevelopment:Thisactivitystrivetomaximizethe
benefit received from a suppliers engineering, design, testing, manufacturing and tooling
resources.Qualifiedsuppliers,whichtakepartdirectlyinacrossfunctionalproductdevelopment
team at the buyer, can provide early insight into the production processes. Furthermore, by
involving and inviting a supplier to take part in these types of R&D projects can lead to better
design solutions regarding quality and the need of production resources (Trent, et al., 1999),
whichoftenleadstobothbetterqualityandalowerpurchasingprices.Thisisanimportantstep
of supplier quality development although it improves both the suppliers and the buying firms
quality. As touched upon in the privies step, the level of supplier relationship is extremely
importantinthis activity aswell.Thebuyer andthe supplier needs to have a relationship which
strivestoachieve,anascloselytooptimum,winwinsolutionforbothparts.
Figure37AchievingWorldClassSupplierQuality(Trent,etal.,1999)
Figure37presentsactivitiesin3dimensions,allthreegofrombasicandsimpleonestomoreadvanced
andchallengingones,butofcoursethepossibleimprovementsthatcanbegainedalsoincrease.Two
important things that must not be overlooked are the fact that, at the same time as the activities
escalatesinthehierarchytheinvolvementoftopmanagementandmutualeffortsbecomesmoreand
more necessary. One more solution is that the buying firms also can support suppliers regarding
improvementsintheirqualityimprovementprograms.Ontheotherhand,verticalintegrationisnota
suitablesolutionsinceverticalintegrationmayresultinlossoffocus,theremaybediseconomiesof
scale in managing vertically integrated firms and the bargaining power of the vertically integrated
suppliermayreappearwithincorporatedivisionsafterverticalintegration.(Helper,etal.,1992)
In his PhD report Krause (1995) presents several activities to develop suppliers performance, these
activities partly overlap with the above mentioned steps. Krauses suggestions are: introducing
competition into supplier base, supplier evaluation, raising performance expectations, recognitions
and awards, the promise of future benefits, training and education of suppliers personnel, ongoing
and frequent communication, long term relationships, exchange of personnel between buying firm
and supplier, and direct investment in the supplier by the buying firm. It should be noted that all
findingspresentedinthereportarebasedonseveralandseriousstudiesandhavebeenprovedtheir
benefitinmostcases.Yet,theywillnotbedescribedindetailinthischaptertoavoidrepetition.
Supplierqualitydevelopmentin
developingcountries
Under the influence of globalization and freemarket trends western companies face serious
competitionfrom lowcost countriesdueto strong pressure on cost. This fact has led companiesto
expand their sourcing operations into developing countries to seek for low cost suppliers.
Unsurprisingly, lower prices do not come for free and wellestablished western companies face
problemsespeciallyinqualityaspectswiththeirsourcingpartners.Thisqualityissuehasitsrootcause
in existing difference between the buyer and the lowcost suppliers business environment, culture,
and perspectives. Eatkins (2005) claims that quality development of global suppliers is more
problematic because of cultural barriers, technical and quality capabilities and hurdles including the
tendency to cheat the system, systematic concerns, and financial resource issues, such as liquidity,
willingnessandabilitytoinvest.Thesefactscomeasastrongchallengeandamplifytheimportanceof
supplierqualitydevelopmentindevelopingcountries.
Aschallengesaredifferentactivitiestopursuesupplierqualitydevelopmentindevelopingcountries
also are different to some extent. First of all selection and preevaluation of the suppliers is a vital
requirement. As it would be difficult to evaluate them objectively because of long geographical
distance between the supplier and the buyer, dependence on international quality standard
organizations such as ISO must increase. Supporting findings stating that ISO 9000 registered
companies exhibit higher levels of quality, leadership, information sharing, analysis skill, strategic
qualityplanning,qualityassurance,andqualityresultshasbeenfoundinanempiricalstudydoneby
(Roa,etal.,1997).However,westerncompaniesshouldstillbeverycarefulevaluatingsupplierswhich
haveISOcertificates.Thisisbecausetherecouldbsomesupplierthatexaggeratetheirqualityoutputs
untilreceivingthecertificationandgoingbacktoold,lackinghabitualwayofconductingoperations.
Another relatively new and interesting approach to supplier quality development in developing
countriesistousebenchmarkingactivities.Forqualitymanagement,benchmarkingtraditionallyisan
internally focused activity. Benchmarking is beneficial since many methods already have been
developedanddescribedbyacademicliteratureandsincemanymethodsandconceptsalreadyhave
been successful implemented in the real business world. Transferring the existing knowledge, skills,
and experience of highly competent suppliers especially regarding quality to the poorly performing
suppliersshouldbeeasierthantoinitiatethedevelopmentactivitiesfromaveryearlyphase.
Thereexistseveralstudiesintheacademicliteraturethatdescribesbenchmarkingmethods,yetfirms
can if wanted and needed create and follow their own way of benchmarking, based on their own
needs, regarding supplier development. Two of the methods or tools to be followed when
benchmarkingsupplierisdescribedinstudiesdonebyForker(2001)andChoy(2002).
Casestudy:Volvo3p(2)
The case study is handled as an interview with Mr. Peter Thomasson from the
International Purchasing Department of Volvo 3P. Findings will be presented below
without stating the questions as they are considered as peripheral compared to the
informationgiven.
Casedescription
Company profile: Volvo 3P is the business unit (BU) responsible for product planning,
productdevelopmentandpurchasingforthefourtruckcompanies,VolvoTrucks,Mack
Trucks,NissanDieselandRenaultTrucksandworksasconsultantinstatedareas.BUhas
around 3000 highly qualified employees in several countries where Volvo Group exists
but mainly located in Gothenburg and Lyon. When it comes to purchasing BU is
responsible only for procurement of components used in the trucks which contribute
more than % 70 of the whole trucks value and together with Volvo Powertrain make
purchases for nearly SEK 70 billion and the Volvo Group invests about SEK 8 billion in
research and development. As stated, BU is only responsible for component
procurement to be able to focus solely on that area. Other types purchasing activities
such as services, maintenance, repair, operating supplies and equipments used in
facilitiesaremainlyconductedbytheNAP(NonAutomotivePurchasing)sectionofthe
group.
Supplier selection criteria and quality perspective of the BU: Volvo 3P has highly
developedandcomplexsupplierselectionprocessastheyareknownasfussyinsupplier
selection.It is notgoing to be presentedhere becauseit is out of topic range but it is
worthmentioningthat4keycriteriainsupplierselectionarerespectivelyQuality,Cost,
Delivery,andFeatures.Volvo3Phasitsownqualityperspective.Firstly,tobeconsidered
asasupplierwithgoodquality,notmorethan40ofthesuppliedcomponentsoutof1
millionshouldbefailedfunctioning.Secondly,deliveryisanimportantcomponentofthe
quality. Lastly, a more subjective perception within Volvo 3P is that supplier would be
consideredtohavegoodqualityiftheirlevelisaboveexpectations.
How does Volvo 3P conducts supplier quality development relatively to the model
givenbyTrentandMonczka,(1999)?:Although,Volvo 3Pdoesnottakethepresented
modelasitsmainguideline,BUhasmanyactivitiesconductedtodevelopsupplierquality
thatoverlapwithTrentandMonczkas,(1999)model.Overlapsareshortlystatedbelow.
Optimize supplier base to a manageable level: Volvo 3P is already known for its picky
supplier selection model. The company has 100 evaluation metrics applied in a pre
selection period which some of them classified as vital without meeting that specific
metric it is impossible to go through the preevaluation process and additionally
suppliershavetomeetatleast60ofthesemetricstobeasupplieroftheVolvoGroup.
As it is already difficult to be a supplier of Volvo 3P, BU applies a Global Purchasing
Management(GPM)programtowardsitssupplierstooptimizethecurrentsupplierbase
toamanageablelevel.
Measuresupplierqualityperformance:BUhas2modelsimplementedforsupplierquality
performance measurement and evaluation. The first one is called Quality Performance
Measurement(QPM).Withthisprogramsuppliersqualityisperiodicallymeasuredand
feedbacksaregiventothemaccordingly.SecondoneiscalledSupplierEvaluationModel
(SEM)andhasasimilarapproachbutwithabroaderperspectiveapplyingtootherareas
aswellsuchascostsanddeliveries.
Establish aggressive supplier improvement targets: Inspired by its best peer suppliers,
Volvo3PimplementedaggressivesupplierimprovementtargetscalledPremiumSupplier
andBUhassomeincentivesthatarementionedbelowfortheoneswhichareclassified
inthisgroup.AccordingtoMr.Thomassonthecriteriaforbeingclassifiedinthisgroupis
toughandcomplexandnotmanyofthesuppliersareabletofulfilthatdemand.
Rewardsuperiorsupplierperformanceandimprovement:Relevanttoputtingaggressive
improvement targets some of the suppliers who have been classified as Premium
Supplieraregivensomekindofrewardsmostlyasrecognitionand highermargin.Last
only 40 of thousands suppliers are classified as Premium Supplier and only 8 out of 40
hasbeenrewardedaftertheeliminationprocessesbasedonsomesubjectivecriteria.
Certify supplier processes and methods: BU did not develop a specific certification
programtocertifyitssuppliershoweveritusesindicespreparedforsomeofthefields
thatfunctionsomehowascertification.Volvo3Palsoexploitscertificationspresentedby
international organizations. Mr. Thomasson stated that it is difficult and not worth to
developacertificationmodelspecificforVolvoGroup.
Commit the necessary resources to supplier development: BU does not commit any
significantresourcestoimprovesupplierqualityforthereasonsgivenbelowintheVolvo
Waysubsection.
Involve suppliers early in product and process development: It is technically one of the
mostimportantaspectsforVolvo3Ptoconduct.Asmajorityofthecomponentsinthe
trucks are produced by suppliers and as these areas are not considered as core
competence by Volvo, suppliers have been deeply involved in product and process
development for 15 years. Indeed, they are almost completely free in developing their
own components to Volvo. Suppliers only receive rough drawings and standards
required by company and free to continue dominantly involving development of the
products. Core competence areas where suppliers are not involved in product
development in the Volvo Group are: powertrain, outer design of the truck and sheet
metal.
Volvo way: Although, many activities of Volvo 3P overlap with the model presented
above,BUhasitsownunderstandingandmethodsusedinsupplierqualitydevelopment.
First of all, the main focus in Volvo 3P is not continuously improving quality level of
suppliersasMr.Thomassonthinksthatitwouldtakemanyeffortsthatwouldnotgive
requiredoutput.AllsuppliersareimportanttoVolvo3Panditisnotdesiredtochange
suppliers too often that keep quality requirements of selected supplier in a relatively
moderate level. If the supplier is good enough and Bu is satisfied, no quality
development program is applied and everything proceeds in its usual and low intense
level. Quality development programs that are mentioned above mostly applied to
suppliers who show decreasing or poor quality. This is especially true for the suppliers
whomightperformpoorbutsupplyvitalcomponentstotheGroup.Mr.Thomassonsays
thatthesetypesofsuppliersarethemostprioritizedsuppliersforqualityimprovement
activities.Volvo3Pcommitsresourcessolelyforthistypeofsupplierstoimprovetheir
quality level. For instance, site visits with quality engineers to audit only implemented
towardsthatlowperformingcriticalsuppliers.
Aspecificmodelisappliedforlowperformingcriticalsuppliers.Themodelconsistsof4
stepstakenbyVolvo3P.Firststeptakenisadiagnosisoftheproblem.Withinthisstep
thequestionofWhatistheproblem?isansweredbynecessaryanalysesconductedto
describe the problem in detail. With second step called Alert relevant employees of
the Volvo 3P are involved to solve suppliers quality problems. The third step is called
Alarm and is only conducted if the second step did not provide a positive output.
Within this step Volvo 3P simplyinvolves more peopleto solve the problem. The forth
step is called Critical and consist of 2 choices: if low performing critical supplier
performbettergobacktonormalandifnotquitthesupplierandstartchangingsupplier
processes.Therefore,itcanbeconcludedforVolvo3Pthattheyapplybothperspectives
ofsupplierdevelopmentreferringthedefinitionwithtwoperspectivesgivenabove.
Supplier quality development in developing countries: It is evident that Volvo 3P

currently does not have any significantly different activities towards suppliers from
developing countries in quality development wise. On the other hand, BU has applied
specializedandfocusedqualitydevelopmentprogramsforsuppliersfromcountriessuch
as Hungary, Poland, and Slovakia. The reason that currently Volvo 3Ps quality
developmentisnotdifferentinwesternandmaindevelopingcountriesisthatthereare
no significant differences between suppliers from Sweden and suppliers from Turkey
anymore.Theybasicallyhavethesamestandardsandapplytothesamequalitymethods
in production. However, slight differences in Russia Volvos new growing market and
thecountrywhereanewplantwillbelocatedoccur.Currently,therearenosuppliers
supplying components to Volvo 3P in Russia due to quality and communication
problems.AsVolvo3Pwillhavetogetnewsuppliersfromthecountrybecauseoftrends
and requirements, BU is currently conducting education programs for Russian
automotive suppliers with the help of international organizations to inform about
Volvos requirements and expectations and help them to reach the requested quality
level.
Conclusion
This chapter strived to clarify and describe some insights and guidelines within the stateoftheart
regarding supplier quality development. Possible differences in choice of developing activities has
been conducted and compared between western suppliers and suppliers in developing countries,
althoughtherewerenoclearfindingsinthecasestudycomparedtowhatliteraturesuggests.
Itisclearthatactivitiessuggestedforsupplierqualitydevelopmentisnotrocketscienceorsomething
mystique. Probably, many of them have been known to business environments for quite some time
anditseemsthatthereisnoneedtousescientificallycomplexsystemstoconductthem.Ontheother
hand, the human factor should not be forgotten. As interactions between two different business
actorswithhumanfactorsanddifferentenvironmentsaffectingthemarerequired,thiswouldbethe
main obstacle to run aforementioned programs. Still, as studies, surveys, and business cases show
supplier quality development is beneficial for buying firms, if they are conducted carefully and
devotedly.


Supplier-buyer collaboration, one way to reach success 163
[14] Supplierbuyercollaboration,
onewaytoreachsuccess
Collaboration in supplier-buyer
relationships can result in benefits
regarding purchasing performance. This
chapter outlines performance factors
which influences purchasing
performance. Furthermore underlying
conditions and influencing measures
that impacts the performance factors
are presented. A small literature study
review of four studies is also presented,
conducting the performance factors
and their impact on purchasing
performance, regarding collaboration
in relationships.
Introduction
Collaboration in buyersupplier relationships and its impact on purchasing performance has come
more into the spotlight and generated increasing interest within recent time. Buyersupplier
interactions have developed from armlength relationships based on transaction processes to
collaborativerelationships,whicharebasedoninformationsharingandtrust(Hoyt,etal.,2000).
InadditionHorvath(2001)statesthatcollaborationisthedrivingforceofeffectiveandstrategicsupply
chain management. Furthermore collaboration is required among all participants within the whole
value chain. Thereby companies can expect benefits and improvements from strategic supply chain
management.Thesebenefitscanbedividedtimewise:
U Immediatebenefits:Reductionintermsofinventoryrisksandcostsaswellaswarehousing,
distributionandtransportationcosts.
U Longterm benefits: Cost reduction through increased productivity as well as streamlined
businessprocessesinprocurementandpurchasing,orderfulfillment,receivableandpayable
accountsandexceptionmanagement.(Horvath,2001)
Furthermore these benefits can be measured in terms of purchasing performance. Morrissey and
Pittaway(2004)suggestthefollowingkeyattributestomeasurecompaniesperformance:
U Quality: The quality of products can be heavily influenced by the quality of its supplied
components.Failureinqualityhasmoreoftenahighernegativeeffectonthemanufacturer
than on the supplier. However even due financial compensation can be provided, the
reputationaldamageisnottransferablethroughthesupplychain.
U Price: Buying companies need to secure the cost of supplies from the market to be able to
controltheirefficiency.Takingintoconsiderationthatusuallymorethan50percentoftheir
organizational turnoveris represented by supply costs, the potential impact of price on the
companysprofitabilitycantbeunderrated.
U Service: The continuous development of products tending towards commodities caused by
increased global competition reduces the range of product and price differentiation.
Therefore companies focus and compete on service elements. Herein after sales service,
deliveryandleadtimecanbeimprovedbyfocusingonthesupplierbase.
Thepurposeofthischapteristoprovideanoverviewofthedifferentperformancefactorspurchasing
performance is measureable with. In addition underlying conditions and factors influencing the
performancearepresented.Thereforeasmallliteraturereviewcontainingfourstudiesisconducted.
The studies are introduced and their key performance factors as well as influencing conditions are
pointed out. Thereafter results and findings from these studies are presented, followed by a
conclusion outlining the connection between collaboration in buyersupplier relationships and

purchasingperformance.
Thestudies:Review
Four empirical studies researched within the last 3 years are presented, all examining different
businessareasindifferentpartsoftheworld.Thestudiesallfocusoncollaborationinbuyersupplier
relationshipsincombinationwithperformancemeasures.
CorstenandFelde
CorstenandFelde(2005)investigateperformanceeffectsresultingfrombuyersuppliercollaboration
intheirstudy.Inadditiontheconditionsareresearchedunderwhichtheseeffectsoccur.Inorderto
measure performance effects, they focused on three performance factors to evaluate and compare
withtheindustrialaverage:
1. Innovation: As a success factor in terms of reduced R&D expenses in combination with the
productandprocessimprovementlevel.
2. Purchasingcostreduction:Asasuccessfactorcontainingcommunication,transportationand
orderingcosts.
3. Financial performance: Asa success factor including the return on assets and the return on
sales.
Furthermore trust and dependency are introduced as underlying conditions for investigating the
performance effects. Corsten and Felde (2005) argue that trust and dependence can be seen as
influencing conditions for the relationship between collaboration and performance. Hereby among
others they follow the argumentation that trust can have a positive effect on innovation (Hamel,
1991)andthatdependency canhavea negative effect on financial performance (Heide, et al., 1988).
Their empirical study is based on a sample of 135 cross sectional buyersupplier relationships in
Switzerland,wherebythefocuslaysonthecollaborationofbuyerswiththeirkeyOEMsuppliers.
OhandRhee
Another study by Oh and Rhee (2008) examines different types of buyersupplier collaboration and
investigates conditions affecting these collaboration types. The study focuses on the Korean
automotive industry, where an empirical survey is conductedto analyze the collaborations between
the HyundaiKia Motors Corporation and 94 of their first tier suppliers. Oh and Rhee defines five
differenttypesofcollaborationintheirstudy,adjustedtotheautomotiveindustryenvironment:
1. Collaborativecommunication:Intermsofintentandinformationsharingandexchange.
2. Collaboration in new car development: Involving new car design, quality evaluation and
specificationdiscussion.
3. Collaborative problem solving: Routine problem solving regarding cost, utility, delivery and
payment.
4. Strategicpurchasing:Intermsofsupplierevaluationandsupplierselection.
5. Supplierdevelopment:Intermsofassistingsupplierscapabilitydevelopment.
Besides collaboration the focus for this study is limited to the last two types, in order to follow the
scopeofthechapter.Factorsinfluencingthecollaborationregardingstrategicpurchasingandsupplier
developmentarestatedinthestudyintermsofmodulecapability,secondtiersupplierdevelopment
and coordination capability as well as flexibility capability. As an additional underlying condition
technologyuncertaintyisintroducedtoinvestigateitsinteractionwiththeinfluencingfactors.
GonzalezBenito
The study byGonzalezBenito (2007) investigates the relationships between information technology
(IT) investments and operational performance in purchasing. Hereby the strategic integration of
purchasing in companies is considered as an inducing factor for the implementation of advanced
purchasing practices. Besides the practices carried out to establish collaborative relationships
betweenbuyerandsupplieralsosupplierevaluation,supplierinvolvementandlogisticsintegrationare
takenintoaccount.Furthermoretheimplementationofadvancedpurchasingpracticesisconsidered
as an underlying and mediating factor for the relationship between IT investment and operational
performance.Herebyoperationalperformanceinpurchasingismeasuredregardingthefactorscost,
quality,dependabilityandflexibilityfollowingthepropositionofHayesandWheelwright(1988),who
describe them as the basic competitive priorities for the production function. The empirical study is
based on 141 medium and large Spanish companies from the three industry sectors industrial and
commercialmachinery,electronicandotherelectricalequipmentandtransportationequipment.
VereeckeandMuylle
Vereecke and Muylle (2006) examine the relationship between supply chain collaboration and
performance improvement in their study. They investigate the effect of information exchange and
structuralcollaborationonperformanceimprovement.Bothfactorsarestudiedforsupplierandbuyer
separately as well as for companies relating the factors with both supplier and buyer. To measure
performanceimprovement12differentvariablesaredefined,whichcanbegroupedasfollows:
1. Deliveryperformance:Includingdeliveryspeed,customerserviceanddeliveryreliability.
2. Cost:Includinglaborproductivity,capacityutilizationandinventoryturnover.
3. Procurementperformance:Includingprocurementcostandprocurementleadtime.
4. Flexibility:Includingvolumeflexibilityandmixflexibility.
5. Quality:Includingproductqualityandmanufacturingconformance.
The empirical study includes 374 companies from the engineering and assembly industry. The
companiesaresituatedin11Europeancountries:Belgium,Denmark,Germany,Hungary,Italy,Ireland,
TheNetherlands,Norway,Spain,SwedenandtheUnitedKingdom.
Anoverviewofthefourdifferentstudiesandtheirkeyperformancefactorsaswellastheconditions
andfactorsinfluencingthemisstatedinthefollowingtable:
Underlyingconditions,
Study: Researcharea: Performancefactors:
influencingfactors
135crosssectional Innovation Collaboration
Corstenand
OEMsupplierin Purchasingperformance Trust
Felde(2005)
Switzerland Financialperformance Dependence
Modulecapability
94firsttiersuppliersof Secondtiersupplier
OhandRhee Strategicpurchasing development
HyundaiKiaMotors
(2008) Supplierdevelopment Coordinationcapability
Corporation,Korea Flexibilitycapability
Technologicaluncertainty
41mediumandlarge Quality Collaborativerelationships
Gonzalez Spanishcompanies Cost Supplierevaluation
Benito(2007) fromthreeindustry Dependency Supplierinvolvement
sectors Flexibility Logisticsintegration
374companiesfrom Deliveryperformance
the Cost
Vereeckeand Informationexchange
engineering/assembly Procurementperformance
Muylle(2006) Structuralcollaboration
industry,11European Flexibility
countries Quality
Table20Studiesoverview.
Thestudies:Resultsandfindings
ThestudyofCorstenandFelde(2005)conductsthatregardingtheinnovationlevelallthreefactors
collaboration, trust and dependence have an influencing effect. Corsten and Felde (2005)argue that
even in collaborations involving powerful suppliers the knowledge and information exchange
enhancesthebuyingcompanysinnovationlevel.Regardingpurchasingcostsonlytrustcanbefound
having a reducing effect. Furthermore regarding financial performance only collaboration has an
increasing effect. The other underlying factors are not significant for these performance factors. By
measuringdifferentlevelsoftrustanddependenceoftenresultsinthatcollaborationgetsastronger
effectonfinancialperformance,atalowtrustlevelaswellasatalowdependencylevel.Furthermore
collaborationisalsohavingastrongereffectoninnovationatalowdependencylevel.Itisarguedthat
repealingalternativesupplysourcesbypowerfulbuyersoftenresultsinstrongersafeguardeffectof
collaborationatlowlevelsoftrust.
OhandRhee(2008)presentintheirstudythatthestrategicpurchasingmodulecapabilityandsecond
tiersupplierdevelopmentoftenhaveapositiveeffectonefficiency.Furthermorethecombinationof
technologyuncertainty,flexibilitycapability,modulecapabilityandsecondtiersupplierdevelopment
oftenhasanegativeeffect,whereasonlycostreductioncapabilityhasapositiveeffectonstrategic
purchasing.Forsupplierdevelopmentonlyflexibilitycapabilityandsecondtiersupplierdevelopment
arefoundtohaveapositiveeffect.Incombinationwithtechnologyuncertaintynosignificanteffect
can be found regarding supplier development. It is argued that the identification of suppliers with
strong module capability requires efforts in expanding strategic purchasing and can thereby
strengthencollaborationbyitself.Alsothepositiveeffectsfromsecondtiersupplierdevelopmentwill
enhance not only their own, but in addition to first tier suppliers capability and thereby strengthen
thecollaborationregardingstrategicpurchasingandsupplierdevelopment.
The results from the study of GonzalezBenito (2007) show that a relationship exists between IT
investmentandoperationalperformanceinthepurchasingfunction.Furthermoretheimplementation
of advanced purchasing practices enables the company to improve its operational performance.
Especially for improving quality, dependency and flexibility by IT investments, these advanced
practicesaresignificant.Furthermoreallfourmediatingfactorsoftheadvancedpracticescontribute
withapositiveeffectonoperationalperformanceinpurchasingandontheirperformancefactors.It
is argued that these effects are caused by IT investments by supporting companies to implement
advancedpurchasingpracticesandalsoalleviatingstrategicintegrationinpurchasing.
TheresultsinthestudyofVereeckeandMuylle(2006),statethatapositiveassociationofinformation
exchangeandstructuralcollaborationwithallperformancefactorsexistsonaweakbases,bothfor
supplierandbuyerseparately.Regardingcompaniesrelatingthefactorswithbothsupplierandbuyers
only partial support can be found for the assumption that these companies have the largest
performance improvement, still all performance factors have positive improvement effects for both
informationexchangeandstructuralcollaboration.Itisarguedthatthepositiverelationshipbetween
theperformancefactorsandbothoftheconditionsexistsandthatimprovementsgohandinhandfor
both parts, but it is also important to mention that this improvements can be small and not always
considerable.
Conclusion
Theresultsandfindingsfromthestudieshaveshownthatcollaborationinbuyersupplierrelationships
indifferentsettingscanleadtoimprovingperformanceregardingpurchasing.Howevercollaboration
is not a guaranteed way to success, it requires the right conditions and circumstances which have
supportingeffectsonperformanceimprovements.Thereforeawiderfocusonthewholesupplychain
is required. This focus should taking all participants in the value chain into consideration and
implementing collaborative processes among them, benefit in terms of performance improvements
can then be gained. Some collaborative practices to perform can include information sharing, IT
implementation,supplierevaluation,selectionanddevelopment,whicharediscussedmoredetailedin
previouschaptersaswellasinthefollowingchapterofthisbook.


Information sharing, the driver of a proficient buyer-supplier relationship 171
[15] Informationsharing,thedriver
ofaproficientbuyersupplier
relationship
The aim of this chapter is to elaborate
the importance of considering
information sharing within a buyer-
supplier relationship. Focus will be on
declaring the beneficial aspects of a
frequent level of information sharing
between buyers and suppliers. A US-
Japanese case study involving the
companies Cummins and Toshiba will
also be examined and the findings from
this case will be presented in the
analytical part of this chapter.
Introduction
Todayinformationsharingisakeyissuewhenitcomestoverticallyintegrationbetweenfirms.Hence,
toevolvevaluablerelationshipsisofmajorimportancewhenitcomestoacquiringasufficientbuyer
supplier relationship. Basically, better technical understanding from the customers will increase the
production performance among involved suppliers (Rippa, 2007). Furthermore, increased supplier
performance may result in lower prices and better conditions for improved quality. Despite the
recognitionofvalueaddingbyconsideringinformationandknowledgesharing,manyfirmshavefailed
to create such value adding relationships. One problematic factor of this is poor transaction of
informationwithinthesupplychain.However,lacksofknowledgeorreluctancearealsoconsiderable
factorsoffailureinthisarea.Anappropriatelevelofinformationsharingbetweenabuyerandsupplier
mayresultinsignificantimprovedintegrationandtherebyenhancedtechnicalperformanceforboth
counterparts.Bythis,supportiverelationshipsmustbeconsideredtostrengthenthecooperationand
thelinksinarelationship.
Makinguseofcommoninformationisadditionallyawaytofaceimprovementsofuncertaintiesthat
occur through the supply chain. In this way, the structure of a companys internal and external
activities will playa significant role in order to enable sufficient information sharing. The interaction
between human resources, likes employees, and technology needs to be coordinated with
informationandcoordinationtechnologies(Bnte,etal.).
This chapter will encompass the importance of considering information sharing, and the futuristic
advantagesofmaintainingabuyersupplierrelationship.Thestudyisalsointendedtoemphasizethe
link between information sharing and a proficient buyersupplier relationship. In addition, the
disclosureofknowledgesharingandanefficientvalueaddingrelationshipwillalsobeelaborated.
Thischapterisstructuredasfollows:Atfirst,theconceptualframeworkwilladdressissuesregarding
the crucial role of information sharing in a buyersupplier relationship. Subsequently, the case of
Cummins and Toshiba will be illustrated in order to exhibit a present situation between buyer and
supplier.Thecasestudywillbefollowedupbyananalyticalpartwhichaimstoelaboratetheacademic
issuesintheconceptualframeworkwiththecaseofCumminsandToshiba.Finally,aconclusionwill
comparethechapterofimportantinputsinregardstotheexecutedstudy.
Conceptualframework
This part is intended to consider theoretical information in regards to information sharing in buyer
supplierrelationships,whichwillfurtheronbeexploitedintheanalyticaldiscussion.
Informationsharinginbuyer
supplierrelationship
(Handfield, et al., 1999) State that information sharing is one of the core issues in supply chain
management and purchasing excellence. It is possible to categorize information sharing after two
commonvariantsasittranspires.Thefirstoneisknownaspurchasinginformationsharing;inthis
case the buyer reveals operational information, examples, number of purchasing orders etc. The
secondvariantissupplychaininformationsharing,herethebuyerhasaccesstotacticalinformation
such as inventory levels, order specifications and sales and operation plans etc (Kulchitsky, et al.,
2007).Moreover,supplychainrelationshipsmayconsistofproperinformationsharingandcommon
developmentofactivitystructures(Liker,etal.,2004).
Also the sustainable supply of information, products and services are crucial in supply chain
management. In order to achieve the sustainability, relationships should be considered between
appropriatepartners.Thisisthewaytomanageuncertaintiesandenhancethelevelofexchangeof
knowledgeandinformation(Lambert,2008).
The relationship within the supply chain does not only represent the connection to one specific
partner,butalsohowthefirmisconnectedtoothermemberswithinthesupplychain.Thebuyerand
supplierrelationshipmaybeidentifiedafterthesetwoconnectionsofafirminthesupplychain,but
the two connections should also be considered as interdependent factors in accordance with the
relationshipandthebelongingsupplychaindesign.Asconclusionofthis,informationsharingcanbe
consideredaslinksbetweensupplierrelationships.
Asuccessfulexchangeofinformationsharingmaybedistinguishedasthreebeneficialaspects.Atfirst,
the business transaction of information will occur throughout the supply chain. Secondly, the buyer
andsupplier canbe moreinterdependent;dueto that information will beavailable more openlyfor
the both parts. And lastly, the members of the supply chain can work with new information and
achieveenhancedintegrationandexchangeofcompetencessuchasinformationandknowledge.In
this way, the competences among the partners can be jointly exploited and the individual firms
performancewillbesignificantlyimproved(Hsu,etal.,2008)
Inordertoestablishproductiverelationshipswithsuppliers,anunderstandingofthelinkagebetween
supplier and buyer is necessary. This is also necessary when it comes to the disclosure of
consequencesofthefirmsperformanceandneededcapabilities(Truman,2000).
Benefitsofinformationsharingin
buyersupplierrelationship
Gadde,etal.(2007)mentionthatthefirmisenclosedbyvarioustypesofboundaries.Theboundaries
of information and knowledge are of major importance to exchange with an appropriate business
partner. Additionally, the consumer requirements can with more successfulness be achieved if
appropriately information is being shared between the buyer and supplier. In these ways, products
andservicesfromcompetitorsmaybesignificantlyimproved.Thefirmmayimprovetheaccessibility
toadditionalresourceswithintheboundariesandinthismatterthecollaborationbetweensuppliers
withvitalresourcesisavaluableresourcebyitself(Hunt,2000).Thebuyersarenormallyinterestedin
findingappropriatesupplierswithvital resources to engage relationships with. In this sense, proper
information and knowledge as well as risk can be exchanged. The outcome of a long term buyer
supplier relationship will be improved coordination of business process and enhanced flexibility of
resource combining. In the coordination process both parts needs to share different kind of
managerial information to be able to come up with common goals. That correct information is
exchangedandutilizedbetweenthepartnersisimportanttomaketherelationshipsuccessful(Gadde,
etal.,2007).
Affectionsonbuyersupplier
relationship
The advantages of a beneficial relationship are an enhanced ability to engage buyers, suppliers and
otherbusinesspartnerstoencouragevaluableexchangesofinformation.Hunt(2000)Emphasizethat
relationshipsshouldbe treated as resources and thus in this way be an important part of the firms
assetstomaintain.Fromamarketperspective,theassetofthefirmisofmajorimportancebecauseit
beneficiallyaffectstheprofitabilityaswellastheloyaltyfromthecustomers.
Firms that diligently workwith valuable supplier relationships will approach a better respond to the
changing market demands. This will result in a better customer service and an improved technical
enlargement. In addition, a sufficient buyersupplier relationship can also be a way to reduce the
transaction uncertainties that mayoccur in the business exchange process. In this way, the supplier
basecanbegraduallyreducedandtheproductionperformancecanbemorecomprised(Hsu,etal.,
2008).
Casestudy:CumminsandToshiba
The case below will exhibit a US Japanese case study, described from Gadde, et al.
(2007). The study reveals the crucial role of buyer and supplier relationship with a
sufficient level of information sharing between the Japanese producer of ceramic
Toshiba,andCumminstheAmericanproducerofdieselengines.
Casedescription
Intheeighties,Cumminssinnovativeideawastodevelopadieselenginewithnoneed
foracooling system.Thus,thecrucialissuefortheprojectwastodevelopsustainable
ceramic components. Cummins started its selection process of finding appropriate
suppliers for developing the ceramic. A great deal of visits and communications with
different suppliers were held. One of the companies that came to attention was the
JapaneseproducerofceramicToshiba.
However,duringtheearlyphaseofprojecttheconditionsforCumminschanged,dueto
researchprovedthatredesignoftheenginecouldbemadeinordertoachieveenergy
efficiency.Theceramicscouldalsobeusedtootherfunctionsduetoitsnewdiscovered
wear resistant. Cummins now initiated a R&D program for exhibiting a solution. The
research showed that silicon nitride was the material that was needed to perform the
operation.Cumminsstartedanewevolutionprocessofpotentialsuppliers.Attheendof
thisprocessToshibawasthemostsuitablecompanybecausetheyhadthesamewayof
workingandcommonobjectivesandattitudes.
Afterexecutivenegotiations,bothcompaniesdecidedtoconsiderajointrelationship.It
wasalsoagreedonacommonworkingplanwiththesametimetableetc.Toshibaand
Cummins created a common project team consisting of people from each of the
companies.Although, theintentionwasto jointly decide which components thatwere
essentially to go further with for development. The wear resistance components were
precededandtestedfrombothcompanies.Aftersuccessfultechnicaldevelopmentand
cost minimization of the components of the engine, Toshiba was appointed for the
manufacturingpartoftheengineandCumminsforthedesign.Atthistime,therewere
greatdealsoftechnicaluncertaintiesinregardstotheresultofthenewengine.
Inearly1987,theteamhadmanagedtoachieveadequateperformancedata,butwithno
customers. At the same moment, Cummins had experienced some major engine
components wear problems, which required redesign of the components. Cummins
decided to consider a field test with about 60 engines, and by this in the end of 1989
they managed to get rid of the problem. They could now equip all the engines with
correct ceramic components that were found during the field test. At this time the
relationship and thereby the cooperation between Toshiba and Cummins was so
successfulthattheyformedajointventurenamedEngineeringceramicTechnologies
(Enceratec)intheUS.
Finally, there were two main reasons why Enceratec was founded. At first the both
companiesfeltthattheyhaddevelopedajointuniquecompetencetogether.Thesecond
reason was that Toshiba had an unoccupied capacity in its production and thereby a
need to cover the unoccupied capacity. From Cummins point of view, the interest of
reducing production cost of purchased components was one of the underlying

backgroundstothejointventurewithToshiba.
Reflectionofthecase
The purpose of this section aims to expose important analytic reflections in regards to information
sharingandtherelationshipbetweenCumminsandToshiba.Additionally,thispartcanbeconsidered
asananalyticalpartofthecase,weretheconceptualframeworkisbeingemphasizedcontrathecase
study.
Thecrucialroleofinformationsharing
ThecaseofCumminsandToshibarevealedthecrucialroleofinformationsharingwhenitcomesto
combining resources. Thus, recombining of the resource structure between internal and external
resourceswilldevelopasufficientlevelofcooperationandconfrontation.Theoutcomeofthiswillbe
enhanced information and knowledge accessibility for both companies. With evolved information
sharing, more accurate cost estimation can be taken into consideration. For instance, in the
development of the wear resistance ceramics, by considering efficient information sharing between
thecompanies,informationcouldjointlybeexploitedandtherebythecostofthedevelopingprocess
could be minimized, due to better opportunities for planning. In addition, with the sufficient
relationship between Toshiba and Cummins, lifecyclecost and the technical solution for the engine
couldjointlybeingimproved.Thus,thediligentlyexchangeofinformationwasinthiscaseconclusive
forthesuccessfuloutcome.EfficientsharingofinformationbetweenCumminsandToshibaenabled
improvedinvestmentsforproductionservicesofthebothcompaniesintheproject.
In close examination of the case between Cummins and Toshiba, the both companies could take
advantage of purchasing information sharing, thus Cummins openness in terms of the close
relationship with Toshiba made it possible to jointly access strategic information such as required
specificationsfortheceramics.Inthiscase,CumminswasveryopentothesupplierToshibawithdetail
specification of the essential components for the engine. As a result from this, more accurate
investmentsandpossibilitytolowerthecostcouldbeachieved.
Although,supplychaininformationsharingwasalsoafactinthecase,acommonworkingplanand
timetablemadeitpossibletomoreaccuratelyplanthequantityandthequalityoftheoperationsin
the project. Furthermore, with the trust and cooperation which seems to occur between the two
companies,additionalresourcecombiningintermsofsharedemployeescouldbetakenintoaccount.
Theactivitystructureofthetwocompaniescouldevenbecombinedbyconsideringjointdevelopment
oftheenginecomponents.Thus,thebothcompaniesdividedresponsibilitiesfordifferentpartsofthe
project,inthiswaytheybothcouldexploittheircorecompetences.Inthefinalstageoftheengine
project,therewereagreatdealofuncertainties,butwithadequatelevelofinformationsharingand
trustbetweenthebothcompanies.Theuncertaintiescouldinthiswayeasierbemanaged.
Theimportanceoftherelationshipbetween
CumminsandToshiba
One of the underlain key success factors between Cummins and Toshiba were the well adapted
relationshipbetweenthetwocompanies.Withoutthisextensiverelationship,inadequateamountof
information should be exchanged and the project had been significantly harder to execute. When
CumminsevaluatedToshibaasasupplier,theydiscoveredthatagreatdealofsimilaritiesbetweenthe
companies. Thus, the activity structures in terms of working methods were similar. The activity
coordinationoftheboundariesforthebothcompanieswaswellcoordinatedduetotheirexpertiseof
competencewithintheirspecificareaofenginecomponents.Furthermore,theexchangeofinternal
activitiesforCumminswerecoordinatedwiththeundertakenactivatesbyToshiba.Forinstance,the
commonwaytoreveltheneededceramiccomponents,madeanefficientactivitycoordinationwithin
therelationship.
Whenthe both companies created a common project team to investigate the required components
for the engine, they had through this founded a proficient resource element. A successful level of
interactionintheworkingteamresultedinabetterresourceutilization.Thiscombinationofresources
betweenCumminsandToshibawasalsothewaytoinnovativelydesignthenewengine.Inaddition,
Cumminswasfromthebeginningcleartoformobjectives.Moreover,Cumminsinspectedtheactivity
structureandresourcestiesofToshiba,thiswasnecessarilytoavoidtoomuchadaptively,whichwill
result in that the resources may loses its value. Consequently, if the competence within the joint
developmentteamweretoomuchadapted,theresourceselementwouldbeconsideredasasingle
resourceelement.Theconsequenceswithtoomuchadaptabilityandsingleresourceelementinthe
project team will be that the buying company Cummins will lose its ability and capacity to be
innovativeandlackofotherdevelopingcapabilities.
When Cummins and Toshiba decided to jointly run a project, Cummins existing resources structure
becomequestionedfromvariousdirectionsofToshiba.Thesequestionsareofmostimportanceinthe
development stage to achieve confrontation, which is of major importance for a well working
resource element and relationship between the two parts. In addition, to acquire the efficient
relationship,CumminschallengedToshibainearlystage,byconsideringthetechnicaldemandsofthe
ceramiccomponents.
In this way, a strong coordination in the relationship between Toshiba and Cummins occurred.
Although, when the cooperation between them begun, an enhanced interdependence and stronger
integration was the result of the jointly performed project. The close relationship made also that
knowledgesharingcouldbebetterutilized,duetotheefficientexchangeoftheservicesthroughthe
supplychain.
Finally, the project of the ceramic diesel engine ended up in a joint Venture in the US between the
both companies Cummins and Toshiba. Thus, this can be considered as a successful result of an
evolvingrelationshipbetweenthepartners.Thestrongbindingsofinformationsharingbetweenthe
activitiesandwelladaptedresourceelementresultedinaninnovativesolutionoftheceramicdiesel
engine.
Conclusion
Academic studies prove the beneficial aspects of exploiting information sharing between buyer and
supplier.Thereluctanceofnotconsideringadequateexchangeofinformationwillresultinincreased
costs and enhanced level of uncertainty in business relationship. This chapter has emphasized the
crucialaspectsbyconsideringasuccessfullevelofinformationsharingbetweenabuyerandsupplier
situation.
Inaddition,therearenumerousofconclusionsthatcanbeconsideredfromthecasestudybetween
Cummins and Toshiba. Although, the frequently exchange of information resulted in an efficient
relationship between the both parts.Thus, the importance of information sharingwhen it comes to
integratingofactivitiesandutilizecombiningofresourceswithinrelationshipsmaybeconsideredas
significant.
Awelladaptedrelationshipwithanappropriatelevelofinformationsharingwillbethebackboneof
innovativeness and reduced life cycle costs. Furthermore, minimized cost and enhanced technical
performance are also aspects which will be significant improved with adequate level of information
sharing. Finally, the information sharing in a buyersupplier relationship will play a crucial role to
improvetheindividualfirmsoverallperformance.
Appendices 179
[16] Appendices
Exampleofresultsfromthemodel
Performance Human Qualitysystem Manufacturing Business Information
assessment resources assessment criteria criteria technology
Supplier1 0,482 0,587 0,738 0,311 0,231 0,429
Supplier2 0,279 0,285 0,179 0,507 0,411 0,429
Suppler3 0,239 0,128 0,083 0,181 0,358 0,143
Performanceassessment

Humanresources
Qualitysystemassessment

Appendices 181
Manufacturingcriteria
Businesscriteria

InformationTechnology
(Sevkli,etal.,2008)

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PURCHASINGMANAGEMENT

CHALMERS
DEPARTMENTOFTECHNOLOGYMANAGEMENTANDECONOMICS

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CHALMERS

MartinDahl,abecoming graduate mechanical engineer at Chalmers Universityof Technology. After

NojanNajafigothisB.S. in Industrial Engineering at Azad University of Najafabad. Being involved in

Internal network of activities, resources External network of activities, resources

Internal organizational tasks: External collaboration tasks:

Havingidentifiedthe goalsandrequirements forthe organization, the appropriate structure for the

Interdepartmental interaction represents the communication aspects associated with activities

1. The presence of an internal organization that is able to support communication and

Strategic purchasing competency centres will be established at dominant

Purchasing portfolio models 39

Purchasing portfolio models 41

Typeofeconomy Interdependency Managementfocus Typeofrelationship

Economiesof Serial Coordinationand Linked(streamlined)

Economiesof Reciprocal Confrontationand Problemsolving

Thefirst stepistodistinguishgroups ofproducts andtheir characteristics. The evaluation is divided

High Leverageproducts Strategicproducts

Low Noncriticalproducts Bottleneckproducts

Performanceassessment Relationshipcharacteristics Networkposition

investments Low Marketexchange Captivesupplier

An interesting issue to consider here is that according to Bensaous observations, no significant

Historically,Volvo Logistics has notusedany outspoken model forpurchasingstrategy

Suppliers are selected based on past experiences, knowledge, suitability,

Requirementsthata companycould puton their suppliers involves demands on legal requirements,

Innovest Strategic Value Advisors, a company specialized in analyzing companies

Environmentally Preferable Purchasing 87

Environmentally Preferable Purchasing (EPP), commonly called Green Purchasing, is defined as an

Theinformation contained in thesetables can be used as recommendations for procurement of the

As other manufacturers focus efforts on avoiding or reducing smaller sets of specific

Information Systems in Purchasing Management 97

First and foremost, companies are interested in adopting ITbased purchasing

Anotherexample of auctionsis thereverseauction. This one is common in the businesstobusiness

Multicriteriadecision Mathematical Multivariatestatistical

As discussed earlier, supplier selection is a strategic decisionmaking problem and treating it as an

Procurement Procurement Procurement Procurement Procurement

Purchasing Purchasing Purchasing Purchasing Purchasing

Quality Efficiency Cost Productivity

Environmentalperformanceis emerging as a factor to consider in supplier selection (Humphreys,et

Theeight Effectof Effectof Keyfactorsfor Keyfactorsfor

Leadership Quality Quality Quality Comformance

Mutuallybeneficial Innovation Flexibility Qualitycontrol

Furthermore, in order to be the companys business partner, suppliers are obliged to

Theresults of thequalitative interviewwith the purchasing managerPeter Thomasson

certification programs, top management involvement, promising of current and future

Basically,knowledge is distinguished intoexplicit knowledge and tacit knowledgedepending on the

Accordingto FoosT.etal.,(2006),inmanycases,ratherthanbeingregardedasanindividual issue,

Supplier quality development in developing countries: It is evident that Volvo 3P

conclusion outlining the connection between collaboration in buyersupplier relationships and

reducing production cost of purchased components was one of the underlying

Performance Human Qualitysystem Manufacturing Business Information

assessment resources assessment criteria criteria technology

Supplier1 0,482 0,587 0,738 0,311 0,231 0,429

Supplier2 0,279 0,285 0,179 0,507 0,411 0,429

Suppler3 0,239 0,128 0,083 0,181 0,358 0,143

Badenhorst J.A. Unethical behaviour in procurement: a perspective on causes and solutions

Bevilacqua M. A fuzzyQFD approach to supplier selection [Journal]// Journal of Purchasing and

Carter C.R. Ethical issues in international buyersupplier relationships: a dyadic examination

Carter C.R. Interorganisational Antecedents and Determinants of Environmental Purchasing: An

Christensen P. and Rasmussen B.D. Implementation of Environmental Management in the Danish

Dagens Industri [Online]. 2008. 17 11 2008.

de Boer L. A review of methods supporting supplier selection [Journal]// European Journal of

Fujimoto T. Seisan shisutemu no shinkaron (Evolutionary Theory of Production Systems) [Report].

Gece B. Developing a "Supplier Selction System" [Report]: MasterThesis/ Chalmers University of

GonzalezBenito J. Information technology investment and operational performance in purchasing